After word leaked out over the past weekend that ConocoPhillips was in serious discussions to buy the fellow Houston-based Burlington Resources, the companies finalized on Monday an even richer deal than was initially reported.
ConocoPhillips ended up agreeing to increase the purchase price for Burlington from $30 billion to $35.6 billion, which computes to $90.69 per share of Burlington stock. That price is about a 10% premium on the $82.50 price for Burlington stock at the close of the market on Monday and an almost 20% premium on the price of Burlington stock from just this past Friday. ConocoPhillips will pay that amount in cash and stock, giving Burlington shareholders $46.50 in cash and .7214 share of ConocoPhillips common stock, which was equal to $44.19 of ConocoPhillips stock as of Monday’s market close. Current ConocoPhillips shareholders will own 83% of the company upon completion of the merger, which the companies expect to close during the first half of 2006.
ConocoPhillips will finance the acquisition mostly through debt, which has been its modus operandi during an acquistion spree under CEO James Mulva over the past several years. ConocoPhillips’s net debt will increase by about $18 billion to fund the acquisition, although Mr. Mulva noted yesterday that the company projects that net cash flow should retire 50% of that debt over the next three years.
As the market reverberates from the size of ConocoPhillips’ bet on the increasing value of Burlington’s unconventional natural gas assets, the logical question is “who’s next?” Burlington is one of several mid-tier exploration and production companies that have substantial North American gas assets and thus, those other companies could also be potential targets of bigger companies that elect to match ConocoPhillips’ bet of continued high natural gas prices. Among these other companies are EOG Resources Inc., XTO Energy Inc., Southwestern Energy Co., and Ultra Petroleum Corp., and even larger independents such as EnCana Corp., Devon Energy Corp., Pioneer Natural Resources, and The Woodlands-based Anadarko Petroleum Corp. could end up being targets of major E&P companies trying to lock up natural gas assets in a rising market.

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.

Inasmuch as big-time college football is to the National Football League as triple A minor league baseball is to Major League Baseball, a team’s branding rights can become an important asset. Along those lines, this interesting Austin American-Statesman article reports on the surge in royalty income that the University of Texas is enjoying from its athletic teams’ recent successes:

The Longhorns’ Rose Bowl victory over Michigan in January and the baseball team’s national title in June helped boost University of Texas merchandise royalties 29 percent to $4 million in the last fiscal year, . . . So far this year, [UT] has collected more royalties than any of the 200-plus schools affiliated with the Collegiate Licensing Co., which coordinates licensing for most major universities.
To license its trademarked logos, UT charges 8 percent of a product’s wholesale price. If a $20 Longhorns T-shirt has a wholesale price of $10, UT would get receive 80 cents. It might not sound like much, but consider that retail sales of collegiate merchandise topped $3 billion last year, according to Collegiate Licensing.
Add a football championship to that, and last year’s $4 million could end up looking like a paltry sum.

The article goes on to note that UT’s annual royalties from merchandise sales had fallen to a mere $600,000 as of the end of the John Mackovic era, which suggests that UT’s considerable investment in Mack Brown has been pretty darn savvy, after all.