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PROBLEM 8-13 Given Exhibit P6-11.1 Income Statement and Balance Sheet values are in Thousands XTO Energy Chesapeake Energy Ticker PERIOD ENDING Income Statement ($000) Total Revenue Cost of revenue Gross Profit Operating Expenses Selling, general, and administrative Depreciation, depleletion, and amortization Others Operating income or loss Income from Continuing Operations Total other income/expenses (net) Earnings before interest and taxes Interest expense Income before tax Income tax expense Net income from continuing operations Nonrecurring Events Effect of accounting changes Net income Preferred stock and other adjustments Net income applicable to common shares Balance Sheet ($000) Assets Current Assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets Long-term investments Property, plant, and equipment Goodwill Other assets Deferred long-term asset charges Total assets Liabilities Current Liabilities Accounts payable Short/Current long-term debt Other current liabilities Devon Energy XTO 31-Dec-04 CHK 31-Dec-04 DVN 31-Dec-04 1,947,601 436,998 1,510,603 2,709,268 204,821 2,504,447 9,189,000 1,535,000 7,654,000 165,092 414,341 11,880 919,290 896,290 615,822 992,335 1,616,000 2,334,000 3,704,000 919,290 93,661 825,629 317,738 507,891 (20,081) 972,254 167,328 804,926 289,771 515,155 64,000 3,768,000 475,000 3,293,000 1,107,000 2,186,000 507,882 507,882 515,155 515,155 2,186,000 (10,000) 2,176,000 9,700 14,713 364,836 47,716 436,965 5,624,378 49,029 6,110,372 6,896 51,061 477,436 32,147 567,540 136,912 7,444,384 95,673 8,244,509 1,152,000 968,000 1,320,000 143,000 3,583,000 753,000 19,346,000 5,637,000 417,000 29,736,000 425,173 75,534 259 872,539 91,414 - 1,722,000 1,378,000 - Total current liabilities Long-term debt Other liabilities Deferred long-term liability charges Total Liabilities Stockholders' Equity Preferred stock Common stock Retained earnings Treasury stock Capital surplus Other stockholders' equity Total stockholders' equity Total liabilities and stockholders' equity Other Financial Data Exploration expenses (thousands) Shares Outstanding (millions) Year-end 2004 Closing Price Market Capitalization (millions) 500,966 2,053,911 199,753 756,369 3,510,999 963,953 3,076,405 107,395 933,873 5,081,626 3,100,000 7,796,000 366,000 4,800,000 16,062,000 3,484 1,239,553 (24,917) 1,410,135 (28,882) 2,599,373 6,110,372 490,906 3,169 262,987 (22,091) 2,440,105 (12,193) 3,162,883 8,244,509 1,000 48,000 3,693,000 9,087,000 845,000 13,674,000 29,736,000 599,500 332.9 $ 35.38 $ 11,778.00 184,300 253.2 16.50 4,177.80 279,000 482.0 $ 38.92 $ 18,759.44 $ $ Solution (All values in thousands) a. XTO Energy Chesapeake Energy Devon Energy Enterprise Value (EV) EBITDA EBITDAX EV/EBITDA Multiple EV/EBITDAX Multiple P/E Multiple EV based on EBITDA for BR using comps Plus: Cash Less: Interest-bearing debt Equity value Equity value per share EV based on EBITDAX for BR using comps Plus: Cash Less: Interest-bearing debt Equity value Equity value per share Equity value per share based on P/E multiple XTO Interest-bearing debt (ST<) Common equity (price x shares outstanding) Less: Cash and equivalents Equals: Enterprise value b. Enterprise Value Calculations CHK DVN c. 8-13 es are in Thousands Apache Burlington Resources APA 31-Dec-04 BR 31-Dec-04 5,332,577 946,639 4,385,938 5,618,000 1,040,000 4,578,000 173,194 1,270,683 162,493 2,779,568 215,000 1,137,000 640,000 2,586,000 857 2,780,425 117,342 2,663,083 993,012 1,670,071 2,586,000 282,000 2,304,000 777,000 1,527,000 (1,317) 1,668,754 (5,680) 1,663,074 1,527,000 1,527,000 111,093 1,022,625 157,293 57,771 1,348,782 13,860,359 189,252 104,087 15,502,480 2,179,000 994,000 124,000 158,000 3,455,000 11,033,000 1,054,000 202,000 15,744,000 1,158,131 21,273 103,487 1,182,000 2,000 415,000 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 1,282,891 2,619,807 1,022,880 2,372,481 7,298,059 1,599,000 3,887,000 851,000 2,396,000 8,733,000 98,387 209,320 4,017,339 (97,325) 4,106,182 (129,482) 4,098,239 11,396,298 5,000 4,163,000 (2,208,000) 3,973,000 1,078,000 7,011,000 15,744,000 2,300,000 327.5 $ 50.57 $ 16,561.68 258,000 392.0 $ 45.00 $ 17,640.00 This is not the year-end price for BR. It is an estimate based on the 2004 price range. n thousands) Apache Value Calculations APA Average Multiple for Comps BR Burlington Resources (BR) - Actual Burlington Resources (BR) - 2005 Forecast Solution Legend n in problem alculation/Analysis required e analysis or Short answer required or Solver cell ll Input ll Output . It is an estimate Problem 8-13 MINI CASE VALUING CONOCOPHILIS' ACQUISITION OF BURLINGTON RESOURCES. Suppose that you were working as an equity analyst in 2005 and were assigned the task of valuing the proposed acquisition, which is 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 ConocoPhilips 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 from 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 P8-13.1 (pp.307-310) (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 ConocoPhilips pay too much or find a bargain? Explain your answer. (d) What additional information would help you with this analysis