Conoco's Buy Is a Bust

Readers of this site know that I have been a big-time proponent of ConocoPhillips(COP) for a long time. And the relationship has been mutually beneficial. However, yesterday management broke my heart.

Conoco announced a major deal with the purchase of Burlington Resources(BR). I term it a BUST, a big, ugly, stupid transaction. It hardly ruins the case for Conoco as an investment, but it is very disappointing nonetheless.

Never in my investment career have I witnessed a deal such as this. Never before have I seen a large commodity company buy another similar business at the top of the cycle on a dilutive basis. Never have I seen a company use its 6 P/E ratio-valued stock to purchase similar assets at over a 100% premium to the value of its own.

What in the world is Conoco management thinking?

The CEO of Conoco had developed a reputation as a savvy acquirer, purchasing major oil production and refining assets at excellent prices over the past few years. In my opinion, all of that goodwill was flushed down the toliet with the Burlington announcement, especially because just one month ago, Conoco's management portrayed the deal environment as "challenging" and as a "seller's market" at its annual analyst meeting.

What do Conoco shareholders get for $35 billion? Burlington's assets are fine, even if they are mostly mature, domestic and natural-gas based. But they simply give Conoco more of the same type of assets, and that has gotten the company the lowest valuation of any energy company in the U.S.

I am not a permabear on all transactions. In fact, I recently praised Chevron's(CVX) purchase of Unocal in Barron's. The difference? Chevron purchased Unocal for $10 per barrel of oil equivalent vs. Burlington's price of $18. I'd say that the 80% difference matters. In fact, I'd say to Jim Mulva, Conoco's CEO, that at $10 per barrel of oil equivalent, buy two Burlingtons!