December 12, 2005 -- 6:27 a.m. EST
A ConocoPhillips Deal
That's All About the Gas
By JOSEPH SCHUMAN
THE WALL STREET JOURNAL ONLINE
In the past two years, few energy issues have sparked as much ado in macroeconomic circles as the supply of natural gas in North America, and it's at the heart of what looks to be an acquisition by ConocoPhillips that could top $30 billion.
ConocoPhillips, the third-largest U.S. petroleum company, is in advanced talks to acquire Burlington Resources. And while the negotiations remain fluid and could still fall apart, the two Houston-based companies appeared close to an announcement that could come as early as this week, people familiar with the matter tell the Financial Times. Such a deal would count as the largest merger in the oil-and-gas industry since the wave of consolidation that gripped the industry starting in the late 1990s. By acquiring Burlington, Conoco would be taking control of a collection of assets stretching from the continental U.S. to Algeria, Latin America, China, and the North Sea. In addition, Burlington has 34% of its production in Canada, where Conoco had been actively looking to expand in recent months, the FT notes. Many analysts have been predicting consolidation in the cash-rich oil-and-gas industry, but the high price of assets was seen as hampering activity.
The acquisition would give ConocoPhillips control of important natural-gas exploration areas in the U.S., where Burlington has been using new drilling technologies in its search for new reserves, the New York Times points out. Other major oil companies, including ExxonMobil and Royal Dutch Shell, have been moving aggressively in recent months to increase their U.S. natural-gas production. The Burlington negotiations come against a backdrop of soaring natural-gas prices around the U.S. following hurricanes this year that knocked out production at platforms in the Gulf of Mexico. Frigid temperatures in some parts of the country in recent days have pushed prices even higher. Last week, natural-gas prices reached more than $15 per thousand cubic feet in trading, a near record, the Times notes. Natural gas -- which is used to heat a majority of U.S. homes, generates about 20% of electricity and serves as a raw material for everything from plastics to fertilizer -- is a particularly hot commodity right now, in part because of the growing U.S. economy and because it burns cleaner than other fuels.
But North American production has been at best flat in recent years and an effort to import more on tankers is still in its infancy, The Wall Street Journal says. In recent years, Federal Reserve Chairman Alan Greenspan and others have bemoaned the lack of gas-importing infrastructure, but the perceived dangers of such coastal gas facilities -- as terrorism targets, among other threats -- has proven to be a significant obstacle.
Some in the oil industry have said such strong energy prices in a traditionally cyclical business make it a bad time to buy assets. But others counter that strong commodity prices should stick around for a few years amid growing world-wide demand, making deals for companies with solid assets a good bet. The Organization of Petroleum Exporting Countries, which meets today in Kuwait to chart 2006 policy, is confident oil demand will be boosted by strong global economic growth next year and prices will average more than $50 a barrel, the FT notes. Energy ministers gathering for the cartel's meeting are expected to maintain its current output goals. Saudi Arabia's oil minister said yesterday that strong demand has kept prices high, the New York Times reports, and he added that it was too early to consider paring the group's output in anticipation of a slowdown in consumption next year.
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How Viacom Schmoozed Away Spielberg
Paramount Pictures yesterday confirmed it had reached an agreement to acquire DreamWorks SKG, the studio founded 11 years ago by Steven Spielberg, David Geffen and Jeffrey Katzenberg. But in revealing the terms of the $1.6 billion deal, Paramount included one unforeseen twist, the Los Angeles Times notes. To offset as much as $1 billion of the financial hit, the studio plans to sell DreamWorks' 59-film live-action library, which includes the Academy Award-winning films "American Beauty" and "Gladiator." The studio said it was in advanced talks with outside investors, but instead of having a stake in the studio itself, those investors would buy control of the library outright. Paramount would pay $775 million in cash and initially assume $825 million in DreamWorks debt. Then, a private-equity group, not yet selected, is expected to acquire the library for $850 million to $1 billion, including the assumption of $550 million in the DreamWorks debt taken on by Paramount.
The deal also will give Viacom the right to distribute movies from DreamWorks Animation SKG, a separate public company, but some analysts have questioned whether a small studio with a mere 60 titles in its library is worth so much, The Wall Street Journal notes. Mr. Spielberg extracts a high price for his services as a director and a producer. And DreamWorks' recent track record is dotted with bombs such as the $126 million "The Island," which sold $36 million of tickets domestically. Nevertheless, Viacom's 11th-hour steal epitomizes the reasons why Hollywood can be a difficult place for a management-intensive company like rival bidder General Electric to succeed, the Journal says.
Though it had agreed to the broad contours of its own deal in the early fall, long before Viacom even emerged as a real contender, GE spent many weeks doing its review of a final agreement, and appeared unwilling to take the plunge. Indeed, one person remained unconvinced: GE Chairman and Chief Executive Jeffrey Immelt, who according to someone familiar with his thinking, was still uncomfortable with the valuation of DreamWorks, the Journal reports. That hesitancy effectively left the door open to another party. In a movie industry that values relationships and high-stakes bets, industrial and financial behemoth GE puts a premium on rigid return-on-investment calculations and a deliberate timetable. While Viacom schmoozed Mr. Spielberg and made things easy by not sweating small deal points, neither Mr. Immelt nor NBC Universal Chairman and Chief Executive Bob Wright directly solicited the support of the famous director.
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