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ConocoPhillips to Buy Burlington Resources for $35.6B

Major producer ConocoPhillips last week struck a deal to buy independent producer Burlington Resources for $35.6 billion, making the new company one of the top natural gas producers in North America and fueling speculation that this may be the start of a merger wave by cash-rich majors looking to pick up natural gas properties. Later in the week the Houston-based major faced criticism that the transaction was over-priced.

The stock-and-cash deal was the culmination of active negotiations that took place over the "last several months" between the two producers, said ConocoPhillips Chairman and CEO Jim Mulva, but he added the transaction "was a vision [the parties] thought about over a number of years." ConocoPhillips, which has a net income of $8.13 billion, is the third-largest integrated energy company in the United States in terms of market capitalization and has the eighth-largest total of proved reserves.

Burlington Resources Chairman and CEO Bobby S. Shackouls said there were no other bidders for his Houston-based company, which is one of the world's largest independent exploration and production (E&P) companies with a net income of $1.53 billion in fiscal year 2004. "We looked around [at] the potential field of possible combinations. This one made tremendous sense to us," he said during a joint ConocoPhillips-Burlington Resources telephone briefing with reporters last Tuesday.

"We look[ed] at Burlington Resources and what we [found] without any doubt is quality assets" in terms of North American natural gas reserves and resources, Mulva noted. "The other thing...that's very compelling" is that, based on the high prices anticipated for natural gas over the next few years, ConocoPhillips expects to "pay off all the debt associated with this transaction" quickly, he said. "Essentially half [of] the capital employed to make the acquisition will be paid off within about three years."

The announced deal took a toll on ConocoPhillips' stock last Tuesday, which fell 4.98% to $58.20 and rose slightly later in the week to $58.77. Meanwhile, Burlington Resources stock jumped $3.57 to $86.07 a share on the news of the merger last Tuesday.

The proposed ConocoPhillips-Burlington Resources marriage was not the largest in terms of purchase price, but it ranks right up there. Some of the biggest oil and gas mergers came in the past seven to eight years, during which Exxon purchased Mobil for $77 billion, Chevron bought Texaco for $35.7 billion and Conoco acquired Phillips for $53.5 billion.

ConocoPhillips came under criticism last week for the huge purchase price. In a statement, Mulva defended the high-priced transaction, saying that "access to quality long-term resources has become much more difficult and expensive," the Wall Street Journal reported. "We are in an extremely competitive environment and a portfolio of assets of Burlington's quality cannot be replicated," he added.

Under the terms of the deal, Burlington Resources shareholders will receive $46.50 in cash and 0.7214 shares of ConocoPhillips common stock for each Burlington Resources' share they own. This represents a transaction value of $92 per share, based on the closing price of ConocoPhillips' shares on Dec. 9, according to ConocoPhillips.

Burlington Resources holds one of the industry's leading positions in North American natural gas reserves and production. At the close of 2004, the company had total reserves of 2,001 million boe (MMboe), or 12 Tcf equivalent of natural gas. In 2005, Burlington Resources had an estimated production of 475 thousand boe/d, and access to significant conventional and unconventional resources.

The combined ConocoPhillips-Burlington Resources company would have pro-forma reserves of 10.5 billion boe as of the close of 2004, of which 52% are in North America, and pro-forma production of 2.3 MMboe/d in 2005, half of which is in North America, ConocoPhillips said. With the acquisition, ConocoPhillips' gas reserves would make up more than 40% of its energy reserves portfolio. ConocoPhillips previously said that its goal was to achieve a 50-50 balance of its oil and gas reserves, but Mulva said that was no longer the company's objective.

"Obviously, sure we would like to have more gas in the portfolio and the acquisition of Burlington Resources accomplishes that. But ConocoPhillips does not have a stated goal of getting to 50-50," he told reporters.

In addition to its E&P activities in North America and overseas, ConocoPhillips owns gas gathering, processing and marketing assets, including a 50% equity interest in Duke Energy Field Services LLC. Burlington Resources is actively engaged in E&P activities in North America, with a key focus on the Rocky Mountain gas fairway of the U.S. and Canada. ConocoPhillips has 38.500 employees worldwide, of which 4,500 are located in Houston. Burlington Resources employs approximately 2,200 workers.

Based on the closing market prices for the shares of both companies on Dec. 9 and their debt levels as of Sept. 30, the combined ConocoPhillips-Burlington Resources company would have an enterprise value of $135 billion ($106 billion of equity, and $29 billion of net debt and preferred securities). Existing ConocoPhillips shareholders will own about 83% of ConocoPhillips following the transaction, while Burlington Resources shareholders will own the remaining 17% of the new company.

ConocoPhillips said it will fund the acquisition of Burlington Resources through existing cash on hand, existing credit facilities, and new additional bank and bond debt. The company plans to use cash from operations in future years to reduce its outstanding debt. The transaction, based on 2006 First Call estimates, is expected to be accretive to near-term production growth and cash flow per share, and slightly dilutive to ConocoPhillips near-term earnings per share.

Mulva expects the deal to be only "mildly dilutive" to net earnings. "We believe that we structured the transaction with a significant amount of cash such that the dilution...is modest," he noted, adding that "from a cash flow point of view, it's very accretive."

ConocoPhillips said it plans to achieve synergies and pre-tax cost savings of about $375 million annually after the operations of the two companies are fully integrated. The acquisition is conditioned upon the approval of Burlington Resources' shareholders and customary regulatory approvals. The deal is expected to be completed in the first half of 2006.

The acquisition will not require the approval of ConocoPhillips' shareholders, but it will need to be cleared by the Federal Trade Commission, Mulva said. He noted he doesn't expect the FTC to order any divestitures. Burlington Resources said it would file a registration statement (S4) with the Securities and Exchange Commission, which the agency will review over a 10- to 60-day period.

Upon completion of the merger, Shackouls and Steven J. Shapiro, executive vice president of finance and corporate development, will retire. Randy L. Limbacher, currently Burlington Resources' executive vice president and COO, will become executive vice president responsible for North and South America, reporting directly to Mulva.

William B. Berry, currently ConocoPhillips' executive vice president of exploration and production, will become executive vice president responsible for Europe, Asia, Africa and the Middle East, also reporting to Mulva. Shackouls and William E. Wade, currently an independent director of Burlington Resources, will join ConocoPhillips' board of directors.

A transition team has been formed and will be led by Limbacher of Burlington Resources and John E. Lowe, ConocoPhillips executive vice president of planning, strategy and corporate affairs.

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