Problem 8-13

Mini-Case Valuing Conoco Phillips Acquisition of Burlington Resources 18 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 global portfolio of integrated exploration, production, refining, and energy transportation operations, thereby positioning the combined company for future growth.

In his letter to ConocoPhillips shareholders contained in the companys 2005 annual report, CEO Jim Mulva described the rationale for the proposed Burlington acquisition as follows:

Burlingtons 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 production and reserves, Burlington also brings well-recognized technical expertise that, together with ConocoPhillips 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.

Solution (All values in thousands)
a.	Enterprise Value Calculations
	XTO	CHK	DVN	APA	BR
EBITDA	1,333,631	1,588,076	6,102,000	4,051,108	3,723,000
EBITDAX	1,933,131	1,772,376	6,381,000	6,351,108	3,981,000
Interest-bearing debt (ST	$ 2,129,445	??	??	??	??
Common equity (price x shares outstanding)	11,778,002	??	??	??	??
Less: Cash and equivalents	9,700	??	??	??	??
Equals: Enterprise value	13,897,747	??	??	??	??
EV/EBITDA Multiple	10.42	??	??	??	??
EV/EBITDAX Multiple	7.19	??	??	??	??
P/E Multiple	23.19	??	??	??	??
	Estimation for each comparable company
EV based on EBITDA for BR using comps	38,797,323	??	??	??
Plus: Cash	2,179,000	??	??	??
Less: Interest-bearing debt	3,889,000	??	??	??
Equity value	37,087,323	??	??	??
Equity value per share	95	??	??	??
		??	??	??
EV based on EBITDAX for BR using comps	28,620,373	??	??	??
Plus: Cash	2,179,000	??	??	??
Less: Interest-bearing debt	3,889,000	??	??	??
Equity value	26,910,373	??	??	??
Equity value per share	$ 68.65	??	??	??
Equity value per share based on P/E multiple	$ 90.34	??	??	??
	Estimation of BR using comparables
Evaluation based on comps
	using ratio of XTO ratios	using ratios of Chesapeake Energy	using ratios of Devon Energy	using ratios of Apache	Burlington Resources
EBITDA					3,723,000
EBITDAX					3,981,000
EV based on EBITDAX for BR using comps	28,620,373	??	??	??	??
Plus: Cash	2,179,000	??	??	??	??
Less: Interest-bearing debt	3,889,000	??	??	??	??
Equity value	26,910,373	??	??	??	??
Shares Outstanding (millions)	392	??	??	??	??
Equity value per share	68.65	??	??	??	??
		??	??	??
Net income applicable to common shares	1,527,000.00	??	??	??	??
Equity value per share based on P/E multiple	90.34	??	??	??	??
b. ???????
c. ????????????

Exhibit P6.11.1 Income Statement and Balance Sheet values are in Thousands xTO ergy Chesapeake Devon Apache Burlington Energy Energy Resources Ticker XTO PERIOD ENDING 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 Income Statemen 000 Total Revenue 1,947,601 2,709,268 9,189,000 5,332,577 5.618.000 436.998 204,821 535.000 946.639 1.040.000 Cost of revenue Gross Profit 1,510,603 2,504.447 7,654,000 4,385,938 4.578.000 Operating Expenses Selling, general, and administrative 65.092 896.290 616.000 173.194 215.000 Depreciation, depleletion, and amortization 414,341 615,822 2,334,000 1,270,683 1,137,000 Others 11.880 62,493 640.000 Operating income or loss 919,290 992,335 3,704,000 2,779,568 2,586,000 Income from Continuing Operations Total other income/expenses (net) (20,081) 64,000 857 Earnings before interest and taxes 919,290 972,254 3,768,000 2,780,425 2,586,000 nterest expense 93,661 67,328 475,000 117,342 282,000 Income before tax 825,629 804,926 3,293,000 2,663,083 2,304,000 317,738 289.77 107,000 993.012 777.000 ncome tax expense Net income from continuing operations 507,891 515,155 2,186,000 1,670,071 1,527,000 Nonrecurring Events Effect of accounting changes (1,317) Net income 507,882 515,155 2,186,000 1,668,754 1.527.000 Preferred stock and other adjustments (10,000) (5,680) Net income applicable to common shares 507,882 515,155 2,176,000 663,074 1,527,000 Balance Sheet ($000) Assets Current A Sset Cash and cash equivalents 9.700 6,896 152.000 111,093 2,179,000 Short-term investments 14,713 51,061 968,000 364,836 477,436 320.000 1,022,625 994.000 Net receivables Inventory 32,147 157,293 124,000 47,716 143,000 57,771 158,000 Other current assets 436,965 Total current assets 567,540 3,583,000 1,348,782 3,455,000 36,912 753,000 Long-term investments Property, plant, and equipmen 5,624,378 7.444.384. 9,346,000 13,860,359 1.033.000 Goodwill 5,637,000 189,252 1,054,000 Other assets 49,029 95.673 417,000 202.000 Deferred long-term asset charges 104,087 Total assets 6,110,372 8,244,509 29,736,000 15,502,480 15,744,000 Liabilities urrent Liabilities Accounts payable 425.173 872.539 722,000 158.131 1.182.000 Short Current long-term debt 75.534. 91,414 378.000 21,273 2.000 Other current liabilities 259 103.487 415.000 500,966 3,100,000 1,282,891 1.599.000 Total current liabilities 963,953 Long-term debt 2.053.911 3.076.405 96.000 2.619.807 3.887.000 6,000 1,022,880 Other liab 199,753 107,395 851,000 es Deferred long-term liability charges 756.369 933.873 4.800.000 2,372,481 2.396.000 8,733,000 Total Liabilities 3,510,999 5,081,626 16,062,000 7,298,059 Stockholders' Equi Preferred stock 490,906 1,000 98,387 Common stock 3.484 3.169 48.000 209,320 5.000 Retained earnings 1,239,553 262,987 3,693,000 4,017,339 4,163,000 Treasury stock 24,917) (22,091) (97,325) (2,208,000) Capital surplus 1,410,135 2,440,105 9,087,000 4,106,182 3.973.000 Other stockholders' 28,882) 12,193) 845.000 29.482 1,078,000 Other Financial Da 599.500 184,300 279.000 2.300.000 258,000 Exploration expenses (thousands) Shares Outstanding (millions 332.9 253.2 482.0 327.5 392.0 2004 Closing Price 35.38 6.50 38.92 50.57 45.000 Year-end Market Capitalization (m 11,778.00 4,177.80 $18,759.44 16,561.68 17,640.00 Ons Exhibit P6.11.1 Income Statement and Balance Sheet values are in Thousands xTO ergy Chesapeake Devon Apache Burlington Energy Energy Resources Ticker XTO PERIOD ENDING 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 Income Statemen 000 Total Revenue 1,947,601 2,709,268 9,189,000 5,332,577 5.618.000 436.998 204,821 535.000 946.639 1.040.000 Cost of revenue Gross Profit 1,510,603 2,504.447 7,654,000 4,385,938 4.578.000 Operating Expenses Selling, general, and administrative 65.092 896.290 616.000 173.194 215.000 Depreciation, depleletion, and amortization 414,341 615,822 2,334,000 1,270,683 1,137,000 Others 11.880 62,493 640.000 Operating income or loss 919,290 992,335 3,704,000 2,779,568 2,586,000 Income from Continuing Operations Total other income/expenses (net) (20,081) 64,000 857 Earnings before interest and taxes 919,290 972,254 3,768,000 2,780,425 2,586,000 nterest expense 93,661 67,328 475,000 117,342 282,000 Income before tax 825,629 804,926 3,293,000 2,663,083 2,304,000 317,738 289.77 107,000 993.012 777.000 ncome tax expense Net income from continuing operations 507,891 515,155 2,186,000 1,670,071 1,527,000 Nonrecurring Events Effect of accounting changes (1,317) Net income 507,882 515,155 2,186,000 1,668,754 1.527.000 Preferred stock and other adjustments (10,000) (5,680) Net income applicable to common shares 507,882 515,155 2,176,000 663,074 1,527,000 Balance Sheet ($000) Assets Current A Sset Cash and cash equivalents 9.700 6,896 152.000 111,093 2,179,000 Short-term investments 14,713 51,061 968,000 364,836 477,436 320.000 1,022,625 994.000 Net receivables Inventory 32,147 157,293 124,000 47,716 143,000 57,771 158,000 Other current assets 436,965 Total current assets 567,540 3,583,000 1,348,782 3,455,000 36,912 753,000 Long-term investments Property, plant, and equipmen 5,624,378 7.444.384. 9,346,000 13,860,359 1.033.000 Goodwill 5,637,000 189,252 1,054,000 Other assets 49,029 95.673 417,000 202.000 Deferred long-term asset charges 104,087 Total assets 6,110,372 8,244,509 29,736,000 15,502,480 15,744,000 Liabilities urrent Liabilities Accounts payable 425.173 872.539 722,000 158.131 1.182.000 Short Current long-term debt 75.534. 91,414 378.000 21,273 2.000 Other current liabilities 259 103.487 415.000 500,966 3,100,000 1,282,891 1.599.000 Total current liabilities 963,953 Long-term debt 2.053.911 3.076.405 96.000 2.619.807 3.887.000 6,000 1,022,880 Other liab 199,753 107,395 851,000 es Deferred long-term liability charges 756.369 933.873 4.800.000 2,372,481 2.396.000 8,733,000 Total Liabilities 3,510,999 5,081,626 16,062,000 7,298,059 Stockholders' Equi Preferred stock 490,906 1,000 98,387 Common stock 3.484 3.169 48.000 209,320 5.000 Retained earnings 1,239,553 262,987 3,693,000 4,017,339 4,163,000 Treasury stock 24,917) (22,091) (97,325) (2,208,000) Capital surplus 1,410,135 2,440,105 9,087,000 4,106,182 3.973.000 Other stockholders' 28,882) 12,193) 845.000 29.482 1,078,000 Other Financial Da 599.500 184,300 279.000 2.300.000 258,000 Exploration expenses (thousands) Shares Outstanding (millions 332.9 253.2 482.0 327.5 392.0 2004 Closing Price 35.38 6.50 38.92 50.57 45.000 Year-end Market Capitalization (m 11,778.00 4,177.80 $18,759.44 16,561.68 17,640.00 Ons