Low Natural Gas Prices Revive Questions About ConocoPhillip-Burlington Resources Deal
( AP ) -- ConocoPhillips' bet on natural gas prices has yet to pay off.
While crude-oil prices rose, surpassing $80 a barrel, U.S. natural gas prices slumped in the third quarter. This has deeper ramifications for ConocoPhillips than for rivals Chevron Corp. and Exxon Mobil Corp. because natural gas accounts for 44 percent of its portfolio
The Houston-based company this week said natural gas at the Henry Hub sold for about $6.16 per million British thermal units in the third quarter, compared with $7.55 in the second quarter and $6.58 in the year-ago period.
Oppenheimer & Co. estimates that low natural gas prices will reduce ConocoPhillips' third-quarter earnings by about $280 million compared with the second quarter.
"The impact is huge," said Fadel Gheit, an analyst at the New-York based investment firm. "It's as if there was a drop of $8 in the price of oil in the same period of time."
ConocoPhillips hiked its exposure to gas-price volatility in 2006 when it acquired Burlington Resources. The deal doubled its North American natural gas reserves.
When it was announced, analysts panned the $36.5 billion deal, the largest U.S. energy acquisition in years. They said ConocoPhillips overpaid for Burlington and was gambling on the price of natural gas in North America. Gas' anticipated drag on ConocoPhillips' third-quarter profits has revived debate on whether the Burlington buy was a smart move.
"At least, for the near term, (the acquisition) has not been a home-run for the company," said Ben Tsocanos, an oil and gas analyst at ratings agency Standard & Poor's. "It certainly is making the company adjust its strategy."
If natural gas would have stayed in a range from $8 to $9 -- where it was at the time of the deal -- the company would have invested more in the Burlington properties, Tsocanos said.
As an example, Tsocanos pointed to the remarks ConocoPhillips' exploration and production executive vice president made in September. The executive, John Lowe, said the company has scaled back its budget for exploration and production in North America, particularly in Canada. Lowe was likely referring to Canada's natural gas sector, which has seen drilling rates decline with gas prices.
"Since gas prices have softened, they are reallocating resources," said Tsocanos. "The company is behaving rationally, allocating capital investment away from North America natural gas toward some areas that have a better return."
ConocoPhillips said the company looks at acquisitions on a long-term basis and recognizes there may be short-term price volatility at times.
"This includes the Burlington acquisition in which we look at a long-term basis versus focusing on short-prices fluctuations," said ConocoPhillips spokesman Bill Graham.
At an energy conference in May, ConocoPhillips' Chief Executive Jim Mulva said the company's breakeven financial costs for the Burlington transaction is a little bit over $4 a thousand cubic feet.
"So when you see natural gas prices at $7 or $7.50, (you see) pretty good income and very strong cash flow," Mulva said. A thousand cubic feet is roughly equivalent to a million British thermal units.
Analysts say Burlington's acquisition makes sense for ConocoPhillips as long as natural gas prices stay above $7.
However, it's too early to make an assessment of the benefits Burlington Resources can bring ConocoPhillips in the long term, Tsocanos said.
"Everything depends on how long gas prices stay soft," he said. "We could see a rebound."
ConocoPhillips shares closed Thursday down 12 cents at $83.94.