THE WALL STREET JOURNAL/BARRON'S ONLINE: Conoco Scorned Could Be a Steal: "It's possible Conoco itself could attract interest from one of the globe's super-major oil companies, including BP (BP), Royal Dutch Shell (RD) or Total (TOT). Conoco's market value is $81 billion, but BP and Royal Dutch are valued at over $200 billion. "The cheapest energy assets in the world are located in Houston [Conoco's home base]," Marcin says. "Investment bankers around the globe all realize that.": Monday 19 December 2005
CONOCOPHILLIPS COULD BE THE BEST value in the energy sector, following last week's selloff in its shares. The stock fell 5.72, to 57.35, on the week, after the company announced a deal to buy Burlington Resources (ticker: BR), a big North American natural-gas producer, for $35 billion in cash and stock.
ConocoPhillips (COP), which hit a 52-week high of 71 in September, now trades for about six times estimated 2005 profits of $9.26 a share and '06 projections of $9.23 a share. Next year's profit forecast could prove conservative, however, if oil and natural-gas prices hold near current levels. Conoco's price-earnings multiple is one of the lowest among big energy producers.
Critics say Conoco is overpaying for Burlington, whose reserves are heavily weighted toward natural gas, at what could be the top of the gas cycle. Natural gas hit a record $15 per million BTUs in trading last week, up from $11 as recently as November and $7 at the start of 2005.
"This wasn't a controversial deal. It was a dumb deal," says Robert Marcin, the head of Defiance Asset Management in Conshohocken, Pa., which holds Conoco shares and recommended them in Barron's in October ("The Hunt for Cheap Stocks," Oct. 3). "I still own Conoco and like it, but this deal destroys value. Burlington management is smart. They're selling out at the top of the market after their stock quadrupled in three years."
Burlington rose 9 points to 85.10 last week, finishing about $2.50 a share below the current value of the Conoco offer.
Marcin argues it was foolish for Conoco to pay around $17 a barrel for Burlington's two billion barrels of energy reserves when Conoco shares effectively are valued at $7 a barrel. "I've never seen a company in my investment career buy a company for 150% above the valuation of its own assets," Marcin says.
Conoco would have done better to use the $17 billion cash portion of the deal for a Dutch-auction tender for its own shares at $70, Marcin says. He estimates that would add as much as $2 a share to Conoco's annual profits.
Credit Suisse First Boston analyst Mark Flannery downgraded Conoco to Underperform from Neutral, saying Burlington "brings greater size to Conoco at an unacceptable cost."
While the acquisition of Burlington is expected to have little impact on Conoco's 2006 per-share profits, Conoco CEO Jim Mulva argued in a conference call that the deal will benefit the company by making it the largest natural-gas producer in North America. It will also balance some of the risks in Conoco's portfolio, which includes investments such as a stake in Russian oil giant Lukoil. Given Conoco's strong cash flow, Mulva said the company may be able to pay off all $17 billion of debt associated with the deal in two to three years.
It's possible Conoco itself could attract interest from one of the globe's super-major oil companies, including BP (BP), Royal Dutch Shell (RD) or Total (TOT). Conoco's market value is $81 billion, but BP and Royal Dutch are valued at over $200 billion. "The cheapest energy assets in the world are located in Houston [Conoco's home base]," Marcin says. "Investment bankers around the globe all realize that."
A year ago, Barron's highlighted the appeal of Burlington and other U.S. exploration and production companies ("Hot and Not," Dec. 27, 2004). We argued these companies' oil and gas reserves were being valued cheaply in the stock market, even after strong gains in their shares during 2004.
The Burlington deal could herald more takeover activity in the E&P group, where the best values may be Anadarko Petroleum (APC) and Pioneer Natural Resources (PXD), which have the lowest values assigned to their energy reserves.
-- Andrew Bary
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