Question
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
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. ???????????? |
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