Well, there has been almost a week’s worth of bets on the proposed ConocoPhillips – Burlington Resources merger, and those bets have been decidedly against ConocoPhillips.
Since Monday, ConocoPhillips shares have been hammered, closing yesterday at $58.77, which is down almost 7% since the proposed merger was announced. Moreover, Houston-based investment bank Sanders Morris Harris and A. G. Edwards both downgraded ConocoPhillips stock to a “hold” from their pre-merger announcement “buy” recommendation. As noted in this earlier post, the ConocoPhillips play for Burlington runs contrary to traditional big energy company policy toward such mergers during times of high energy prices.
Responding to this market skepticism, ConocoPhillips chairman and CEO James Mulva conceded yesterday in public comments that the company is paying “a full price” for Burlington, but that “access to quality long-term resources has become much more difficult and expensive. We are in an extremely competitive environment and a portfolio of assets of Burlington’s quality cannot be replicated.” Mr. Mulva also noted that ConocoPhillips is analyzing whether to use hedges to “either lock in prices or mitigate the potential downside of a reduction in gas prices.” Finally, Mr. Mulva predicted excess cash flow would allow ConocoPhillips to reduce the relatively high debt-to-capital ratio that it is taking on to make the deal to between 18% to 23% by the end of 2006.

Picking up on this early betting trend, Chronicle business columnist Loren Steffy notes in this column that Mr. Mulva has not been a good horse to bet against over the past several years. As Mr. Steffy notes, Mulva has been an ambitious risk taker who stands out among generally conservative big-oil chief executives. Since becoming chief executive at Phillips in 1999, Mulva has engineered a series of deals of a total value close to $30 billion. Among those deals are the 2001 acquisition of refiner Tosco Corp. for $7.5 billion, the $17 billion merger of Conoco and Phillips in 2002, and the September 2004 purchase of a minority stake in Russian oil giant OAO Lukoil, which gave ConocoPhillips a local partner in the competition to tap Russia’s enormous untapped reserves. Although Mulva has financed such acquisitions primarily through debt, that financing technique has turned out to be a good bet as surging profits based on higher energy prices have helped drive ConocoPhillips’ debt-to-capitalization ratio down to around 20% while the company’s liquidity has increased to a robust $2.8 billion.
So, I share Mr. Steffy’s caution about betting against ConocoPhillips in regard to the acquisition of Burlington Resources. Mulva has stood out among the major energy companies in redeploying his company’s profits aggressively, and that strategy has transformed ConocoPhillips from a couple of sleepy mid-tier companies into what could be the second largest publicly-owned oil and gas company in the U.S. That track record indicates that he has a good chance of pulling off his biggest bet yet.