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— Postmortem —
 The rise in natural gas prices made ConocoPhillips Co. look prescient when on Dec. 12, 2005, it announced it would buy crosstown oil explorer Burlington Resources Inc. for $35.6 billion in cash and stock. It also may be the last time the Houston energy giant goes so far out on the M&A limb for a while. When ConocoPhillips CEO Jim Mulva offered $92 per share for Burlington, analysts scoffed. A price of $85 to $90 per share was bandied about when rumbles about a deal surfaced. "It implies ConocoPhillips is using a relatively aggressive price deck," Tudor Pickering Holt & Co. Securities Inc. wrote in a report when the deal was announced. Mulva valued Burlington's natural gas reserves at $3 per thousand cubic feet (mcf), the upper end of the transaction range at the time. It was a winning bet. Natural gas prices were $7 or so per mcf at the time the deal closed on March 31, 2006, and weakened in 2007, but then zoomed to more than $12 mcf. They've retreated to nearly $8 mcf recently.
"For the first year or two, the deal didn't look so good," says Fadel Gheit, an analyst at Oppenheimer & Co., "but [then they started] printing money." Investors still aren't convinced. Granted, ConocoPhillips' stock has increased 33%, to a recent $80.39, from $60.42 the day the deal closed, but it still pales compared with independent oil explorers such as Apache Corp., whose stock has doubled over that period. "Investors want to go with companies that have exposure to reserves, like Anadarko and Apache, and Burlington wasn't enough to do it for them," Gheit explains. "It's still a very large, integrated company, with exposure to downstream, which has been in the doghouse for a while, and exposure to overseas operations, which are not preferred by investors now." Alas, for all the history the deal made -- it ranks as the fifth-largest ever in the oil and gas sector and was the biggest after Chevron Corp.'s $45.8 billion acquisition of Texaco Inc. in 2001 -- and the turnaround in natural gas prices, ConocoPhillips looks to have abandoned acquisitions. "We don't think the climate is right," Mulva said at a press conference after the company's May 14 annual meeting. "We need to demonstrate that we can grow the company organically rather than through M&A." The Burlington deal gave him some assets to work with, since it boosted ConocoPhillips' proved reserves to 11.5 billion barrels of oil equivalent and expanded its natural gas production by more than 50%, to 3.57 billion cubic feet per day, vaulting it past Canada's EnCana Corp. as the leading North American producer. It also improved ConocoPhillips' balance of oil and gas exploration and refining and marketing while adding a few properties in the Gulf of Mexico, where it already had exposure. At an analysts' briefing in March, ConocoPhillips said the synergies between the two companies have also been beyond expectations. "We've been able to capture synergies [by] taking the technology that ConocoPhillips had and applying [it] toward the excellent land base that Burlington had," John Lowe, executive vice president of exploration and production, said at the presentation. But ConocoPhillips has suffered from setbacks since the deal was made. Some top Burlington brass, including Randy Limbacher, head of exploration and production for the Americas, left after the deal closed. And ConocoPhillips' assets in Venezuela were expropriated. Most oil companies, including Exxon Mobil Corp., Chevron, France's Total SA, Norway's Statoil ASA and BP plc, played along with the Venezuelan government, signing agreements to give state oil company Petróleos de Venezuela SA control of their projects' operations in the vast Orinoco field. ConocoPhillips, though, refused to sign. Now it's paying the price through a $4.5 billion before tax noncash impairment charge related to the properties. The company says it's still negotiating with Venezuelan authorities to get "appropriate compensation" and has filed a request for international arbitration. With the Venezuelan situation uncertain, Mulva is examining his growth options. He told analysts in March he'd consider investing $1 billion to $2 billion in nonfood-based ethanol to run through his refining system or $2 billion to $3 billion on an acquisition that would fit well with ConocoPhillips' assets. But another deal on the scale of Burlington isn't in the plans. "We've done quite a bit of mergers, we've done acquisitions, [and] we've done joint ventures, and I think that we pretty well reached the end of that line about 18 months or two years ago," he said. "So what we are concentrating on is really two things: How can we grow the company by spending $15 [billion] or $16 billion a year and making sure we get the most value out of the money that we spend and then be aggressive on shareholder distribution?" It could buy the Canadian oil sands division that EnCana said May 12 it wants to separate from the rest of the company. ConocoPhillips and EnCana already have a joint venture in the region, but BP, Royal Dutch Shell plc and Exxon Mobil are all looking at expanding their unconventional gas resources, too. At the post-annual meeting press conference, Mulva said he didn't anticipate any changes with the company's EnCana JV, nor did he see increased investment or participation in the Canadian oil sands. In fact, he said just the opposite: that ConocoPhillips was expecting to generate $3.8 billion to $4 billion this year from asset sales, including selling more of its gas stations, as it did in December. On Aug. 28, the company did just that, announcing its agreement to sell the rest of its 600 company-owned and -operated gas stations to PetroSun West LLC for $800 million. Mulva also sold other assets during the summer, such as ConocoPhillips' Dutch offshore production unit to NV Nuon for $741 million. Ultimately, CFO John Carrig said, the company aims to use the proceeds of asset sales to reduce its debt-to-capital ratio to between 20% and 25%. "We'd like for the metrics to imply an A credit rating," he said. The asset sales projection surprised some analysts. "I had actually thought the program was winding down a little bit," Mark Gilman, an analyst at Benchmark Co. LLC, said at the meeting. (Gilman asked the company what other assets it wanted to sell, but ConocoPhillips officials wouldn't discuss it.) ConocoPhillips hasn't given up dealmaking cold turkey. In January, it purchased half of TransCanada Corp.'s planned Keystone Oil Pipeline for an undisclosed sum. The 2,148-mile pipeline will be able to ship 590,000 barrels of crude oil from Alberta to Illinois and Oklahoma once it's finished in late 2009. ConocoPhillips previously agreed to buy capacity and had an option to buy the stake. The company has also expanded into power. In August 2007, it bought half of the Sweeny power plant in Texas from Columbus, Ohio, utility American Electric Power Co. for $80 million, including working capital and project debt. It made sense: The 450-megawatt cogeneration plant is within ConocoPhillips' refinery complex 80 miles southwest of Houston. General Electric Co. owns the other half of the plant. ConocoPhillips also recently signed a memorandum of understanding with Petrobras SA, the top Brazilian energy company, to identify opportunities to work together in oil and gas exploration, production, refining, marketing and transportation projects, as well as sugar-based ethanol production, transportation and marketing projects. Such a close working relationship could be significant: In April, Brazil's top oil regulator said that a newly discovered reservoir in the Santos basin known as Carioca may hold 33 billion barrels of oil and gas. If that's true, it would be the world's largest discovery in 30 years. But ConocoPhillips has stayed away from bigger game. The company was expected to be among the bidders for Calgary, Alberta, oil explorer Synenco Energy Inc. but it wasn't. One likely deterrent: Synenco put the price on developing its Northern Lights project in Canada's oil sands at an estimated $10.7 billion. (Total bought Synenco for $475 million in April.) Meanwhile, ConocoPhillips has taken stock of what its valuable assets are. In November, it pulled its Whitegate oil refinery in Cork, Ireland, off the block, saying it saw more value in continuing to operate the plant than selling it. Oppenheimer's Gheit says it's a good time for oil companies in general and ConocoPhillips in particular to be on the M&A sidelines. "Its balance sheet is not strong enough for it to buy another company," he says of ConocoPhillips, which had nearly $22 billion in total debt as of June 30, according to its second-quarter Form 10-Q filed with the Securities and Exchange Commission. "Most of the companies they'd want to buy, their stocks are up 30% to 40%." Tudor Pickering's Dan Pickering believes all that will change if oil prices drop further. "Once oil prices slow, putting pressure on earnings, there will be a stronger incentive to look for acquisitions," he says, predicting ConocoPhillips will be back in the M&A fray. "And when one big company makes an acquisition, the others tend to follow." |
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