Valuing ConocoPhillips?s Acquisition of Burlington Resources. You have recently been hired as an equity analyst by Wall Street Valuation Consultants and have been assigned the task of valuing the proposed acquisition described in the following press release: 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?s global portfolio of integrated exploration, production, refining, and energy transportation operations, thereby positioning the combined company for future growth. In his letter to Conoco 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 fro 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 the production and reserves, Burlington also brings well-recognized technical expertise that, together with ConocoPhillips?s 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. 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 acquisition, mergers and acquisitions, it really becomes more and more of a seller?s market, and terms and conditions are not that attractive to buyers. 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. 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.? (a) 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 P8-11.1 (pp. 304-307) (attached excel sheet) for Burlington Resources and each of the comparable firms. (b) Which of the four firms used as comparables do you think is the best comparison firm for Burlington Resources? Why? (c) Based on your analysis of comparables, did ConocoPhillips pay too much or find a bargain? Explain your answer. (d) What additional information would help you with this analysis?
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