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Suppose that you were working as an equity analyst in 2005 and were assigned the task of valuing the proposed acquisition, which is described in the...

Suppose that you were working as an equity analyst in 2005 and were assigned the task of valuing the proposed acquisition, which is described in the following press release:

18 © 2010 Betty Simkins, Williams Companies Professor of Business and Professor of Finance, Oklahoma State University. All Rights Reserved. Reprinted with permission.

Houston, Texas (December 12, 2005)—ConocoPhillips (NYSE: COP) and Burlington Resources Inc. (NYSE: BR) announced today they have signed a definitive agreement under which ConocoPhillips will acquire Burlington Resources in a transaction valued at $33.9 billion. The transaction, upon approval by Burlington Resources shareholders, will provide ConocoPhillips with extensive, high-quality natural gas exploration and production assets, primarily located in North America. The Burlington Resources portfolio provides a strong complement to ConocoPhillips’ global portfolio of integrated exploration, production, refining, and energy transportation operations, thereby positioning the combined company for future growth.


In his letter to ConocoPhillips shareholders contained in the company’s 2005 annual report, CEO Jim Mulva described the rationale for the proposed Burlington acquisition as follows:

Burlington’s near-term production profile is robust and growing, plus Burlington possesses an extensive inventory of prospects and significant land positions in the most promising basins in North America, primarily onshore. With this access to high-quality, long-life reserves, the acquisition enhances our production growth from both conventional and unconventional gas resources.

Specifically, our portfolio will be bolstered by opportunities to enhance production and gain operating synergies in the San Juan Basin of the United States and by an expanded presence and better utilization of our assets in Western Canada. In addition to growth possibilities, these assets also provide significant cash generation potential well into the future.

Beyond adding to production and reserves, Burlington also brings well-recognized technical expertise that, together with ConocoPhillips’ existing upstream capabilities, will create a superior organization to capitalize on the expanded asset base. We do not anticipate that the $33.9 billion acquisition will require asset sales within either ConocoPhillips or Burlington, nor should it change our organic growth plans for the company. We expect to achieve synergies and pretax cost savings of approximately $375 million annually, after the operations of the two companies are fully integrated.

We anticipate immediate and future cash generation from this transaction that will aid in the rapid reduction of debt incurred for the acquisition and go toward the redeployment of cash into strategic areas of growth. Burlington shareholders will vote on the proposed transaction at a meeting on March 30, 2006.


Exhibit P8-13.1 Income Statement and Balance Sheet Values ($ Thousands)
XTO Energy Chesapeake Energy Devon Energy Apache Burlington Resources
Period ending 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04
Income statement ($000)
Total revenue 1,947,601 2,709,268 9,189,000 5,332,577 5,618,000
Cost of revenue 436,998 204,821 1,535,000 946,639 1,040,000
Gross profit 1,510,603 2,504,447 7,654,000 4,385,938 4,578,000
Operating expenses
Selling, general, and administrative 165,092 896,290 1,616,000 173,194 215,000
Depreciation, depleletion, and amortization 414,341 615,822 2,334,000 1,270,683 1,137,000
Others 11,830 162,493 640,000
Operating income or loss 919,290 992,335 3,704,000 2,779,568 2,586,000
Income from continuing operations
Total other income/expenses (net) 20,081 64,000 857
Earnings before interest and taxes 919,281 972,254 3,768,000 2,780,425 2,586,000
Interest expense 93,661 167,328 475,000 117,342 282,000
Income before tax 825,620 804,926 3,293,000 2,663,083 2,304,000
Income tax expense 317,738 289,771 1,107,000 993,012 777,000
Net income from continuing operations 507,882 515,155 2,186,000 1,670,071 1,527,000
Nonrecurring events
Effect of accounting changes 1,317
Net income 507,882 515,155 2,186,000 1,668,757 1,527,000
Preferred stock and other adjustments 10,000 5,680
Net income applicable to common shares $ 507,882 $ 515,155 $2,176,000 1,663,074 $1,527,000
Balance sheet ($000)
Current assets
Cash and cash equivalents 9,700 6,896 1,152,000 111,093 217,900
Short-term investments 14,713 51,061 968,000
Net receivables 364,836 477,436 1,320,000 1,022,625 994,000
Inventory 32,147 157,293 124,000
Other current assets 47,716 143,000 57,771 158,000
Total current assets 436,965 567,540 3,583,000 1,348,782 3,455,000
Long-term investments 136,912 753,000
Property, plant, and equipment 5,624,378 7,444,384 19,346,000 13,860,359 1,103,300
Goodwill 5,637,000 189,252 105,400
Other assets 49,029 95,673 417,000 202,000
Deferred long-term asset charges 104,087
Total assets 6,110,372 8,244,509 29,736,000 15,502,480 15,744,000
Current liabilities
Accounts payable 425,173 872,539 1,722,000 1,158,181 118,200
Short/current long-term debt 75,534 91,414 1,378,000 21,273 2,000
Other current liabilities 259 103,487 41,500
Total current liabilities 500,966 963,953 3,100,000 1,282,891 1,599,000
Long-term debt 2,053,911 3,076,405 7,796,000 2,619,807 3,887,000
Other liabilities 199,753 107,395 366,000 1,022,880 851,000
Deferred long-term liability charges 756,369 933,873 4,800,000 2,372,481 2,396,000
Total liabilities 3,510,999 5,081,626 16,062,000 7,298,059 8,733,000
Period ending 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04
Stockholders’ equity
Preferred stock 490,906 1,000 98,387
Common stock 3,484 3,169 48,000 209,320 5,000
Retained earnings 1,239,553 262,987 3,693,000 4,017,339 4,163,000
Treasury stock 24,917 22,091 97,325 2,208,000
Capital surplus 1,410,135 2,440,105 9,087,000 4,106,182 3,973,000
Other stockholders’ equity 28,882 12,193 845,000 129,482 1,078,000
Total stockholders’ equity 2,599,373 3,162,883 13,674,000 8,204,421 7,011,000
Total liabilities and stockholders’ equity 6,110,372 8,244,509 29,736,000 15,502,480 15,744,000
Other financial data
Exploration expenses (millions) $599.5 $184.3 $279.0 $ 2,300.0 $258.0
Shares outstanding (millions) 332.9 253.2 482.0 327.5 392.0
Year-end 2004 closing price $35.38 $16.50 $38.92 $50.57
Market capitalization (millions) $11,778.00 $4,177.80 $18,759.44 $16,561.68

Brief Company Descriptions

XTO Energy

XTO Energy Inc. (and its subsidiaries) engages in the acquisition, development, exploitation, and exploration of producing oil and gas properties in the United States. The company also produces, processes, markets, and transports oil and natural gas. Its proved reserves are principally located in the Eastern Region, including the East Texas Basin and northwestern Louisiana; Barnett Shale of North Texas; San Juan and Raton Basins of New Mexico and Colorado; Permian and South Texas Region; Mid-Continent and Rocky Mountain Region in Wyoming, Kansas, Oklahoma, and Arkansas; and Middle Ground Shoal Field of Alaska’s Cook Inlet. As of December 31, 2005, the company had estimated proved reserves of 6.09 trillion cubic feet of natural gas, 47.4 million barrels of natural gas liquids, and 208.7 million barrels of oil.

Chesapeake Energy

Chesapeake Energy Corporation engages in the development, acquisition, production, exploration, and marketing of onshore oil and natural gas properties in the United States. Its properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota, New Mexico, West Virginia, Kentucky, Ohio, New York, Maryland, Michigan, Pennsylvania, Tennessee, and Virginia. As of December 31, 2005, the company had proved developed andundeveloped reserves of approximately 7,520,690 million cubic feet of gas equivalent, including approximately 103,323 thousand barrels of oil and approximately 6,900,754 million cubic feet of natural gas. It also owned interests in approximately 30,600 producing oil and gas wells, as of the above date.

Devon Energy

Devon Energy Corporation engages primarily in the exploration, development, and production of oil and gas. It owns oil and gas properties located principally in the United States and Canada. The company’s US operations are focused in the Permian Basin, the Mid-Continent, the Rocky Mountains, and onshore and offshore Gulf Coast regions; Canadian properties are focused in the western Canadian sedimentary basin in Alberta and British Columbia. Devon Energy also owns properties located in Azerbaijan, China, and Egypt, as well as areas in West Africa, including Equatorial Guinea, Gabon, and Côte d’Ivoire. In addition, the company markets and transports oil, gas, and natural gas liquids; it constructs and operates pipelines, storage and treating facilities, and gas processing plants. As of December 31, 2005, its estimated proved reserves were 2,112 million barrels of oil equivalent. Devon Energy sells its gas production to various customers, including pipelines, utilities, gas marketing firms, industrial users, and local distribution companies.


Apache Corporation engages in the exploration, development, and production of natural gas, crude oil, and natural gas liquids, primarily in North America. It has exploration and production interests in the Gulf of Mexico, the Gulf Coast, east Texas, the Permian Basin, and the western Sedimentary Basin of Canada. The company also holds exploration and production interests onshore in Egypt, offshore in Western Australia, offshore in the United Kingdom in the North Sea, offshore in the People’s Republic of China, and onshore in Argentina. As of December 31, 2005, it had total estimated proved reserves of 976 million barrels of crude oil, condensate, and natural gas liquids, as well as 6.8 trillion cubic feet of natural gas.

However, at an analysts’ meeting, CEO Mulva hinted that the price ConocoPhillips paid for Burlington might be viewed as high by some:

In terms of mergers and acquisitions, it really becomes more and more of a seller’s market, and terms and conditions are not that attractive to buyers. (Source:

Your task is to answer the following basic question: “Is Burlington Resources worth the $35.6 billion offered by ConocoPhillips?” Although you are new to the exploration and production (E&P) industry, you have quickly learned that the method of multiples, or market-based comparables, and specifically the ratio of enterprise value (EV) to EBITDAX are typically used as benchmarks to value E&P companies. In this context, EBITDAX stands for “earnings before interest, taxes, depreciation and amortization, and exploration expenses.” EBITDAX differs from EBITDA in that it adds back exploration expenses in addition to depreciation and amortization—hence the term EBITDAX.

  1. Using the method of multiples based on enterprise value to EBITDAX, the P/E ratio, and the enterprise value to EBITDA ratio, what should the acquisition price be for Burlington Resources shares? Use the following companies as comparables for your analysis: Chesapeake Energy, XTO Energy, Devon Energy, and Apache. Year-end 2004 balance sheets and income statement summary information as well as market capitalization data are provided in Exhibit P8-13.1 (pp.

for Burlington Resources and each of the comparable firms.

  1. Which of the four firms used as comparables do you think is the best comparison firm for Burlington Resources? Why?

  2. Based on your analysis of comparables, did ConocoPhillips pay too much or find a bargain? Explain your answer.

  3. What additional information would help you with this analysis?

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Dear Student, I have completed your assignment. In the excel file, If you want to see the formulas/calculations used,... View the full answer


Exhibit P6-11.1 Income Statement and Balance Sheet values are in Thousands
XTO Energy Chesapeake
Income Statement ($000)
Total Revenue
Cost of...

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