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:

¹⁸ 2010 Betty Simkins, Williams Companies Professor of Business and Professor of Finance, Oklahoma State University. All Rights Reserved. Reprinted with permission.

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.

(Source: http://www.conocophillips.com/NR/rdonlyres/86E7B7A6-B953-4D0D-9B45-E4F1016DD8FD/0/cop_burlingtonpressrelease.pdf)

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.

(Source: http://wh.conocophillips.com/about/reports/ar05/letter.htm)

Exhibit P8-13.1 Income Statement and Balance Sheet Values ($ Thousands)

XTO Energy

Chesapeake Energy

Devon Energy

Apache

Burlington Resources

Ticker

XTO

CHK

DVN

APA

BR

Period ending

31-Dec-04

31-Dec-04

31-Dec-04

31-Dec-04

31-Dec-04

Income statement ($000)

Total revenue

1,947,601

2,709,268

9,189,000

5,332,577

5,618,000

Cost of revenue

436,998

204,821

1,535,000

946,639

1,040,000

Gross profit

1,510,603

2,504,447

7,654,000

4,385,938

4,578,000

Operating expenses

Selling, general, and administrative

165,092

896,290

1,616,000

173,194

215,000

Depreciation, depleletion, and amortization

414,341

615,822

2,334,000

1,270,683

1,137,000

Others

11,830

162,493

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

919,281

972,254

3,768,000

2,780,425

2,586,000

Interest expense

93,661

167,328

475,000

117,342

282,000

Income before tax

825,620

804,926

3,293,000

2,663,083

2,304,000

Income tax expense

317,738

289,771

1,107,000

993,012

777,000

Net income from continuing operations

507,882

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

1,668,757

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

1,663,074

$1,527,000

Balance sheet ($000)

Assets

Current assets

Cash and cash equivalents

9,700

6,896

1,152,000

111,093

217,900

Short-term investments

14,713

51,061

968,000

Net receivables

364,836

477,436

1,320,000

1,022,625

994,000

Inventory

32,147

157,293

124,000

Other current assets

47,716

143,000

57,771

158,000

Total current assets

436,965

567,540

3,583,000

1,348,782

3,455,000

Long-term investments

136,912

753,000

Property, plant, and equipment

5,624,378

7,444,384

19,346,000

13,860,359

1,103,300

Goodwill

5,637,000

189,252

105,400

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

Current liabilities

Accounts payable

425,173

872,539

1,722,000

1,158,181

118,200

Short/current long-term debt

75,534

91,414

1,378,000

21,273

2,000

Other current liabilities

259

103,487

41,500

Total current liabilities

500,966

963,953

3,100,000

1,282,891

1,599,000

Long-term debt

2,053,911

3,076,405

7,796,000

2,619,807

3,887,000

Other liabilities

199,753

107,395

366,000

1,022,880

851,000

Deferred long-term liability charges

756,369

933,873

4,800,000

2,372,481

2,396,000

Total liabilities

3,510,999

5,081,626

16,062,000

7,298,059

8,733,000

Ticker	XTO	CHK	DVN	APA	BR
Period ending	31-Dec-04	31-Dec-04	31-Dec-04	31-Dec-04	31-Dec-04
Stockholders equity
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 equity	28,882	12,193	845,000	129,482	1,078,000
Total stockholders equity	2,599,373	3,162,883	13,674,000	8,204,421	7,011,000
Total liabilities and stockholders equity	6,110,372	8,244,509	29,736,000	15,502,480	15,744,000
Other financial data
Exploration expenses (millions)	$599.5	$184.3	$279.0	$2,300.0	$258.0
Shares outstanding (millions)	332.9	253.2	482.0	327.5	392.0
Year-end 2004 closing price	$35.38	$16.50	$38.92	$50.57
Market capitalization (millions)	$11,778.00	$4,177.80	$18,759.44	$16,561.68
Brief Company Descriptions XTO Energy XTO Energy Inc. (and its subsidiaries) engages in the acquisition, development, exploitation, and exploration of producing oil and gas properties in the United States. The company also produces, processes, markets, and transports oil and natural gas. Its proved reserves are principally located in the Eastern Region, including the East Texas Basin and northwestern Louisiana; Barnett Shale of North Texas; San Juan and Raton Basins of New Mexico and Colorado; Permian and South Texas Region; Mid-Continent and Rocky Mountain Region in Wyoming, Kansas, Oklahoma, and Arkansas; and Middle Ground Shoal Field of Alaskas Cook Inlet. As of December 31, 2005, the company had estimated proved reserves of 6.09 trillion cubic feet of natural gas, 47.4 million barrels of natural gas liquids, and 208.7 million barrels of oil. Chesapeake Energy Chesapeake Energy Corporation engages in the development, acquisition, production, exploration, and marketing of onshore oil and natural gas properties in the United States. Its properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota, New Mexico, West Virginia, Kentucky, Ohio, New York, Maryland, Michigan, Pennsylvania, Tennessee, and Virginia. As of December 31, 2005, the company had proved developed andundeveloped reserves of approximately 7,520,690 million cubic feet of gas equivalent, including approximately 103,323 thousand barrels of oil and approximately 6,900,754 million cubic feet of natural gas. It also owned interests in approximately 30,600 producing oil and gas wells, as of the above date. Devon Energy Devon Energy Corporation engages primarily in the exploration, development, and production of oil and gas. It owns oil and gas properties located principally in the United States and Canada. The companys US operations are focused in the Permian Basin, the Mid-Continent, the Rocky Mountains, and onshore and offshore Gulf Coast regions; Canadian properties are focused in the western Canadian sedimentary basin in Alberta and British Columbia. Devon Energy also owns properties located in Azerbaijan, China, and Egypt, as well as areas in West Africa, including Equatorial Guinea, Gabon, and Cte dIvoire. In addition, the company markets and transports oil, gas, and natural gas liquids; it constructs and operates pipelines, storage and treating facilities, and gas processing plants. As of December 31, 2005, its estimated proved reserves were 2,112 million barrels of oil equivalent. Devon Energy sells its gas production to various customers, including pipelines, utilities, gas marketing firms, industrial users, and local distribution companies. Apache Apache Corporation engages in the exploration, development, and production of natural gas, crude oil, and natural gas liquids, primarily in North America. It has exploration and production interests in the Gulf of Mexico, the Gulf Coast, east Texas, the Permian Basin, and the western Sedimentary Basin of Canada. The company also holds exploration and production interests onshore in Egypt, offshore in Western Australia, offshore in the United Kingdom in the North Sea, offshore in the Peoples Republic of China, and onshore in Argentina. As of December 31, 2005, it had total estimated proved reserves of 976 million barrels of crude oil, condensate, and natural gas liquids, as well as 6.8 trillion cubic feet of natural gas.

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 mergers and acquisitions, it really becomes more and more of a sellers market, and terms and conditions are not that attractive to buyers. (Source: http://news.softpedia.com/news/ConocoPhillips-Plans-To-Acquire-Burlington-14628.shtml)

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. In this context, 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 amortizationhence the term EBITDAX.

1. 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.

for Burlington Resources and each of the comparable firms.

1. Which of the four firms used as comparables do you think is the best comparison firm for Burlington Resources? Why?

2. Based on your analysis of comparables, did ConocoPhillips pay too much or find a bargain? Explain your answer.

3. What additional information would help you with this analysis?