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 THE WALL STREET JOURNAL: Conoco Nears $30 Billion Deal For Gas Producer: "In recent months, Exxon Mobil, BP PLC and Royal Dutch Shell PLC have increased their exploration for natural gas in North America -- and particularly the continental U.S.": Monday 12 December 2005

Burlington Resources Tie-Up
Would Mark Aggressive Push
For North American Assets
December 12, 2005; Page A1

ConocoPhillips is in advanced talks to purchase oil and gas producer Burlington Resources Inc. for more than $30 billion, people familiar with the matter say, in what would be a major bet that supplies of natural gas will remain tight and prices high for years to come.

This would be the largest oil-field deal in the past several years. The talks are still fluid, these people warn, and could fall apart. But should the discussions stay on track, a deal could be announced this week.

Exact terms being discussed couldn't be learned last night. Given Burlington's market value of about $29 billion as of Friday and recent deals that gave shareholders premiums of 10% to 15%, a deal might have to be well in excess of $30 billion to win the support of Burlington investors.

A deal would mark the most aggressive move by a major oil company to bulk up on North American natural-gas production from fields the industry labels "unconventional" -- fields where gas is trapped in tight, rocky underground formations that are difficult to tap. But rising gas prices and improved technology have made developing these gas resources one of the hottest plays in the global hunt for hydrocarbons. Burlington Resources is widely recognized as one of the most disciplined and successful companies developing these gas fields.

Natural gas -- which is used to heat a majority of U.S. homes, generates about 20% of electricity and serves as a raw material for everything from plastics to fertilizer -- is a particularly hot commodity right now. Prices for natural gas on the futures market rose to an intraday record of $15.10 per million British thermal units last week on the New York Mercantile Exchange as cold weather blanketed the Midwest and East Coast.

Demand has surged for natural gas amid the growing U.S. economy and because it burns cleaner than other fuels. But North American production has been at best flat in recent years and an effort to import more on tankers is still in its infancy.

About 80% of Burlington's assets are North American natural gas. These relatively long-producing wells helped the company increase output in the third quarter to the oil and gas equivalent of 2.8 billion cubic feet of gas a day, a 1% increase from a year earlier.

Spokesmen for the Houston-based companies wouldn't comment on the talks when reached late last night.

The talks also come after a yearlong run-up in the prices for petroleum and natural gas has driven up the valuation of oil companies. Burlington Resources' market capitalization Friday was up roughly 80% from a year earlier. ConocoPhillips's stock has also surged during that time.

Some in the oil industry, notably outgoing Exxon Mobil Corp. Chairman and Chief Executive Lee Raymond, have said such strong energy prices in a traditionally cyclical business make it a bad time to buy assets. But others counter that strong commodity prices should stick around for a few years amid growing world-wide demand, making deals for companies with solid assets a good bet. Chevron Corp. gobbled up Unocal Corp. for about $18 billion this year, arguing that Unocal's assets were a perfect fit and enhanced its position in fast-growing Asian markets.

The product of a merger itself, ConocoPhillips was dismissed as recently as three years ago as a last-ditch tie-up of two second-tier companies. It is now regarded by analysts and industry executives as a well-run, hard-charging company that has earned a place in the exclusive club of international oil giants.

ConocoPhillips Chairman and Chief Executive James Mulva is regarded within the industry as an ambitious deal maker and a risk taker who stands out among generally conservative big-oil chief executives. Since becoming chief executive at Phillips in 1999, the Green Bay, Wis., native and sports-car aficionado has put together a string of deals valued at a combined $30 billion.

Among his moves: the September 2001 acquisition of refiner Tosco Corp. for $7.6 billion; the 2002 $17 billion merger of Conoco Inc. and Phillips Petroleum Co.; and the September 2004 purchase of a minority stake in Russian oil giant OAO Lukoil, giving ConocoPhillips a partner in the scramble for Russia's enormous untapped reserves.

Mr. Mulva's latest deal would be his largest acquisition by far, and would represent the third-largest domestic deal of 2005, which has proved an active year across the economy. Buoying the deal activity is a generally receptive mood from shareholders, who want to see corporate boards put their extensive cash piles to work. Energy companies have obliged, splurging for nearly $375 billion in transactions across the globe, including a potential Burlington purchase.

Burlington shares have nearly doubled during the past 12 months, trading as low as $40.40 a share last January, and closed trading Friday at $76.09. ConocoPhillips shares, meanwhile, traded Friday at $63.07 a share, giving it a market capitalization of $87.5 billion.

Mr. Mulva has set himself apart from his larger oil peers by redeploying his profits aggressively. ConocoPhillips was the one of last of the major oil companies to initiate a stock-buyback program and has maintained higher debt ratios, although surging profits have helped drive its debt-to-capitalization ratio down to 21% while building $2.8 billion in cash and cash equivalents.

ConocoPhillips would remain the third largest U.S. oil producer by market value behind No. 1 Exxon Mobil and No. 2 Chevron if it reaches a deal with Burlington, though it would narrow the gap with Chevron considerably based on current prices. By riding strong margins in its extensive refining operations, ConocoPhillips has posted better net income than Chevron in two of the past four quarters.

ConocoPhillips, a major U.S. refiner, has a relatively small portfolio of exploration and production for a company of its size. More than its larger peers, including European oil behemoths, ConocoPhillips has a relatively heavy weighting of oil and gas production in stable industrialized Western nations, including substantial holdings in Alaska. In the past couple of years, it has added more international exposure by acquiring the stake in Russia's Lukoil, closing a deal in Qatar for liquefied-natural-gas exports and aggressively pursuing exploration deals in Venezuela.

The talks between ConocoPhillips and Burlington Resources highlight the move by big oil companies to gain larger exposure to North American unconventional natural-gas fields after years of seeking profits and pouring capital into overseas ventures. In recent months, Exxon Mobil, BP PLC and Royal Dutch Shell PLC have increased their exploration for natural gas in North America -- and particularly the continental U.S.

The draw for these companies are the so-called unconventional gas fields -- large subterranean expanses of rock with natural gas locked inside. One of the earliest converts to unconventional gas was Burlington Resources. The company has extensive holdings throughout the Rocky Mountains, East Texas and Western Canada in key unconventional gas fields. A relatively small part of its portfolio is outside North America. It is exploring and producing oil and gas in Algeria and Egypt as well as offshore China.

Burlington Resources was born from the 19th-century decision to offer railroads land in exchange for building a transcontinental railroad. The former Burlington Northern Railroad Co. and it predecessor companies held on to extensive land and mineral rights after building the railroad, some of which turned out to contain valuable oil and gas and formed the core of what later became the independent Burlington Resources.

Burlington Resources has grown quickly in the past decade, acquiring several smaller companies. In October, Burlington Resources reported a third-quarter profit of $748 million, up 90% from a year earlier, on nearly $2 billion of revenue. The most recent earnings include a one-time $117 million gain from the sale of assets. Last month, Steven Shapiro, executive vice president of Burlington Resources, told an industry conference that the company was wary of buying up assets right now. "We do expect industry consolidation to continue and we expect to participate at some point if the timing is right and we are very comfortable we can create value for our shareholders through participating in it," he said.

Write to Dennis K. Berman at and Russell Gold at

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