ConocoPhillips is negotiating to purchase Burlington Resources Inc. in a huge $30 billion deal in a big bet that natural gas supplies will remain tight and higher prices the norm for the forseeable future. Burlington stock has been a hot item this year, trading at $40.40 a share in January and closing this past Friday at $76.09. ConocoPhillips shares closed Friday at $63.07 a share, giving it a hefty market cap of $87.5 billion. Although negotiations are still ongoing, a deal could be announced by the two Houston-based companies later this week.
Burlington Resources is one of the most successful companies developing natural-gas production from unconventional fields where the gas is embedded in rocky formations that make drilling difficult, expensive and dangerous. Inasmuch as natural gas is a relatively clean-burning fuel that heats a majority of U.S. homes and is widely used in industry, rising prices and improved technology are making unconventional natural gas fields much more attractive to energy companies that are increasingly desperate to increase reserves. About 80% of Burlington’s assets are related to North American natural gas fields.
The impending deal highlights conflicting views in the oil and gas industry as to whether such deals are good buys. On one hand, some traditional voices such as outgoing Exxon Mobil Corp. CEO Lee Raymond take the position that current high energy prices reflect a business cycle and that, as a result, producing and reserve assets are over-priced during such cycles. On the other hand, there is a growing faction in the oil and gas industry that views rising commodity prices as a fundamental shift in the market resulting from growing world-wide demand and slowing growth in supplies. Thus, that view contends that even expensive deals for companies with solid asset portfolios are a good bet, which was the rationale for Chevron Corp.’s $18 billion acquisition of Unocal Corp. earlier this year.