ConocoPhillips agreed to acquire Burlington the day before the January 2006 gas futures contract on the New York Mercantile Exchange settled at a record-breaking $15.378/MMBtu (see Daily GPI, Dec. 14, 2005). On Thursday, November natural gas futures settled at $6.298.
Mulva presided over a conference call with financial analysts Thursday. He and his executive team gathered to discuss a $10.7 billion joint venture with EnCana Corp. to create a new North American heavy-oil company to tap into Canadian oil sands growth. Following the presentation, Mulva was asked about whether ConocoPhillips had foreseen the drop in gas prices when it agreed to buy Burlington.
"Obviously, the natural gas price is lower than what we would have expected," Mulva told analysts.
Last December, ConocoPhillips estimated Henry Hub prices would average $8 in 2006, more than $7 in 2007 and $6 in 2008. ConocoPhillips continues to forecast gas prices to average around $7 next year, Mulva told analysts. Mulva also said ConocoPhillips still expects a long-term compounded annual production growth rate of 3%, including oil from the partnership with EnCana.
The Houston-based producer was criticized last year when it paid the high premium for Burlington. In a statement at the time, Mulva defended the price, and said "access to quality long-term resources has become much more difficult and expensive." ConocoPhillips, he said, is "in an extremely competitive environment, and a portfolio of assets of Burlington's quality cannot be replicated." The deal created the third-largest integrated energy company in North America.
When the transaction closed in April (see Daily GPI, April 3), Burlington shareholders received $46.50 in cash and 0.7214 shares of ConocoPhillips common stock for each Burlington share they owned, representing a transaction value of $92 per share, based on ConocoPhillips closing price on Dec. 9, 2005. ConocoPhillips has underperformed most of its peers since the Burlington deal was announced, and it has recently been trading for around $57-$58/share.
Nearly 80% of ConocoPhillips's oil and gas reserves are in mature regions in North America and Europe, and this year the producer plans to spend $18 billion to finance new drilling projects, upgrade refineries, and make some strategic acquisitions, including a growing stake in Russian oil producer Lukoil. However, with each buy, the company increases its debt. The Burlington deal alone added $19 billion in debt.
Still, Fortune magazine on Thursday put ConocoPhillips at the top of its list among the 10 biggest stocks of the fastest-growing companies. The editors said sustained high oil prices moved the company to the top. "With a price/earnings ratio of six (based on the previous 12 months' earnings), the stock sells at a significant discount to its peers. The gap stems in part from Mulva's willingness to embrace risky exploration projects. But so far Mulva's bets have paid off, making Conoco shares look awfully attractive."
In an interim 3Q2006 update on Tuesday, ConocoPhillips said overall oil and gas production will be about 5% lower sequentially from 2Q2006, mostly because of problems related to the shutdown of BP plc-operated Prudhoe Bay operations in Alaska (see Daily GPI, Oct. 4). Financial results, scheduled to be released on Oct. 25, also will be affected by falling gas prices, it said in a statement.
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