Conoco Puts Match to M&A Tinder

If ConocoPhillips' (COP) quick and generous courtship of Burlington Resources (BR) is any indication, the 2006 energy market will likely be fueled by robust M&A activity.

Late Monday, Burlington announced its intention to be purchased by Conoco in a deal valued at approximately $35.6 billion. Under the terms of the merger agreement, Burlington shareholders will get $46.50 per share in cash and 0.7214 shares of ConocoPhillips stock for each share of Burlington stock currently held. Based on Monday's close, the economic value is approximately $90.69 per share, about a 10% premium to Burlington's closing share price Monday of $82.50.

While there will, no doubt, be plenty of discussion and chatter about whether Conoco paid too much or Burlington took too little, the real news is simple: There are willing buyers and willing sellers in the oil patch, they are large, and it is very likely this kind of activity will continue.

Buying Growth

After the recent congressional hearings at which many of the major energy companies were taken to the woodshed by members of Congress, it should come as no surprise that companies like ConocoPhillips are looking for ways to reinvest their piles of cash into companies that appear to help them produce more energy. While it is much too early to tell whether ConocoPhillips will be more aggressive or efficient with Burlington's assets, which could lead to greater production (the 1+1>2 merger theory), that is the appearance this merger is supposed to provide.

And it is exactly why other major integrated energy companies are going to do the same.

Whether it's Royal Dutch Shell's (RDSa) small but significant entry into the Barnett Shale (a natural gas field in North Texas) or chatter that the majors are looking at EnCana (ECA), the trend is becoming clear. Knowing that they have limited opportunities to meaningfully grow through the drill bit, the majors are going shopping. And that means a number of large independents are in play.