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ExecutiveSummary
ConocoPhillipsisanintegratedoilandgascompanythatrecentlymergedtoformasuccessful
partnership.Thetwocompaniesconsolidatedin2002,andnowareaformidablecompetitorinthe
industry.ConocoPhillipsmaincompetitorsincludelargeoilproducerssuchas:ExxonMobil,BP,and
Chevron.Duetothelargeassetsneededtocompeteinthisindustry,ConocoPhillipsthreatofnew
competitionisveryminimal.Theoilandgasindustryisverycompetitivewiththecurrentcompanies
involved,andConocoPhillipsmustbeverycautiouswhenitcomestosettingpricesinthispricesensitive
industry.ThishighlysensitivepricemarketisthecauseofConocoPhillipstobecomeanintegratedoiland
gascompany.Byintegratingitsprocessfromstarttofinish,ConocoPhillipsisabletokeepproduction
costsdowntohelpachievegreaterprofitsintheend.
ConocoPhillipsmaintainsaratherconservativeaccountingpolicy.Duetotheheavyrelianceupon
assumptionsandestimationsintheenergyindustry,managershavetheabilitytofluffuptheirfinancial
statementstomakeitappearasifthecompanyisverysuccessful.ConocoPhillipsstaysawayfromthis,
andinsteadhasaveryflexibleaccountingpolicythatallowsforamorerationaljudgmentaboutthe
companyscurrentfinancialstanding.Alongwiththisconservativeaccountingstrategy,
ConocoPhillipsmaintainsaverytransparentdisclosurepolicy.Thistransparencyallowsanalyststocome
toamorehonestopinionaboutthecompanyscurrentvalue.
ConocoPhillipsdoesnotwithholdthenegativeinformationaboutthecompanyoranypotential
shortcomingsofthecompany.Thisopenhonestyshowsmanagementsconfidenceinthecompanyand
willingnesstochangewhatiswrongwithitself.Afterdoingfinancialratiosonthecompanyandother
companiesintheindustry,wewereabletoseehowConocoPhillipsmeasureduptoitscompetitorsinthe
integratedoilandgasbusiness.Duetothemergerofthetwocompanies,manyoftheratiosdonevaried
significantlythanwhatwasgoingonintheindustry.However,forthemostpartConocoPhillipsis
steadilyrecoveringsincethejoiningofthetwocompanies,andisnearorabovetheindustryaveragein
manycategories.Forexample,beforethemerger,thetwocompaniesstruggledwiththeirinventory
turnover,andthecompanieswerewellbelowtheindustryaverage.However,aftertheunionbetweenthe
two,ConocoPhillipshastakencontrolofitsinventoryproblemandisnowanindustryleaderinthis
category.AnotherfinancialaspectConocoPhillipshasbeenrecoveringfromafterthemergerisits
creditworthiness.Afterthemerger,
ConocoPhillipswasnearbankruptcyintermsofitsAltmanZ-score,butsincethenthecompanyhas
regaineditsworthiness.ItappearsthatwithtimeConocoPhillipswillbeabletorecoverfromthe
amalgamationofthetwocompanies.Aftercompilingfinancialdatafromthepastfiveyears,we
forecastedfinancialstatementsforthenexttenyears.Indoingso,wewereabletogetabetter
understandingofthepositionConocoPhillipswillbetenyearsfromnow.Weforecastedbaseduponthe
assumptionthatthecompanywillcontinuetogrowattherateithasbeen.Theaccuracyoftheseforecasts
wasoftheutmostimportancebecausethevaluationofthefirmisbasedupontheseforecasts.

Bycarefullyforecastingfuturefinancialstatements,wewerethenabletoanalyzeanddoavarietyof
valuationsonthesestatements.Afterthisanalysis,wecametothejudgmentthatthevalueof
ConocoPhillipsstockisundervaluedbythemarket.Allvaluationmethodsexceptforone,dividend
growthmethod,showedConocoPhillipstobesignificantlyundervalued.Thedividendgrowthmodelisa
verysensitivemodelthatisdependentuponveryaccurategrowthrateforecasts;therefore,webelievethat
ourothervaluationmethodsportrayamoreaccurateassessmentofthefirm.Theotherfourvaluation
methodsaveragedanestimatedvalueof$85.64pershare,whichiswellabovetheobservedpriceon
November1st2006of$60.30.Baseduponthesevaluationsandforecasts,webelievethat
ConocoPhillipsisconsiderablyundervalued;therefore,investorsshouldpurchaseConocoPhillipsstock.

BusinessandIndustryAnalysis
ConocoPhillipsisanintegratedenergycompanyheadquarteredinHouston,Texas,withoperationsinover
40countries.PhillipsPetroleumacquiredConocoInc.onAugust,302002toformConocoPhillips,both
PhillipsPetroleumandConocoInc.hasover100yearsofhistoryintheOilandGasindustry.
ConocoPhillipsoperatesinfourcoreactivities:petroleumexplorationandproduction,petroleumrefining
andmarketing,naturalgasgatheringandprocessing,andchemicalsandplasticsproduction.
ConocoPhillipsisthethirdlargestintegratedenergycompanyintheUnitedStates,basedonmarket
capitalization,andoilandgasprovedreservesandproduction.Theintegratedoilandgasindustryisa
$135billionindustrywithcompetitorsthatincludeExxonMobil,BP,andChevron.Withtherisingprices
ofcrudeoiloverthepastfewyearsandstrongdemandfromtheU.S.andChinamarkets,theindustryis
experiencingsustainedsuccess.ThissuccesshasenabledConocoPhillipstoexperiencesteadygrowthin
thesizeofthecompanyoverthepastfiveyears.Sincethemergerthecompanyhasincreaseditsassets
eachyearwhichhasledtoanexponentiallylargerincreaseinthetotalsalesforthecompany.This
increaseinsaleshassincecausedthestockpricetograduallyrisesincethecollaborationofthetwo
companies.ConocoPhillipscurrentlyhasamarketcapitalizationofaround$95billionwhichiswell
belowtheindustryaverage.

ComparisonData
From Companies' Financials
Income Statement and Balance Sheet

Ticker
PERIOD ENDING (Date)
Income Statement ($000)
Total Revenue
Cost of revenue
Gross Profit
Operating Expenses
Selling, general, and administrative
Depreciation, depletion, and
amortization
Others
Operating income or loss

XTO Energy

Chesapeak
e Energy

Devon
Energy

Apache

XTO
09/30/05

CHK
09/30/05

DVN
09/30/05

APA
09/30/05

Burlingto
n
Resourc
es
BR
09/30/05

2,341,812

2,914,311

7,523,000

5,482,571

5,215,000

115,518

39,640

206,000

152,460

176,000

466,272

656,275

1,647

1,055,583

975,000

547,300
1,212,722

2,218,396

7,315,353

4,274,528

4,064,000

Income from Continuing

Operations
Total other income/expenses (net)
Earnings before interest and taxes
Interest expense
Income before tax
Income tax expense
Net income from continuing
operations
Nonrecurring Events
Effect of accounting changes
Net income
Preferred stock and other
adjustments
Net income applicable to common
shares
Balance Sheet ($000)
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Net receivables
Inventory
Other current assets
Total current assets
Long-term investments

1,212,722
110,559
1,102,163
403,392

936,377
155,623
780,754
284,977

3,490,000
428,000
3,062,000
1,102,000

3,083,214
90,160
2,993,054
1,157,546

21,000
2,873,000
210,000
2,663,000
907,000

698,771

495,777

1,960,000

1,835,508

1,756,000

698,771

495,777

1,960,000

1,835,508

1,756,000

698,771

495,777

1,960,000

1,835,508

1,756,000

12,275
98,879
638,879
66,185
816,218
-

127,102
1,164,607
51,857
1,343,566
256,432

1,095,000
791,000
1,516,000
177,000
3,579,000
918,000

Property, plant, and equipment

8,106,590

10,677,424

18,722,000

Goodwill
Other assets
Deferred long-term asset charges

213,362
199,245
-

88,207
-

5,729,000
395,000
-

Total assets

9,335,415

12,365,629

29,343,000

96,684
1,359,619
198,436
131,866
1,786,605
15,745,48
5
189,252
131,755
17,853,09
7

2,816,000
1,292,000
159,000
309,000
4,576,000
11,950,00
0
1,093,000
239,000
17,858,00
0

673,431
329,563
312
1,003,306
3,229,585
255,563
1,262,939
5,751,393

1,084,722
957,756
2,042,478
4,329,948
127,755
1,659,128
8,159,309

1,851,000
1,227,000
3,078,000
6,765,000
363,000
5,193,000
15,399,000

1,570,750
320,734
251,780
2,143,264
2,405,359
1,059,294
2,532,329
8,140,246

1,274,000
830,000
12,000
2,116,000
3,893,000
957,000
2,861,000
9,827,000

3,647
1,884,729

1,047,367
3,494
686,426

1,000
45,000
5,543,000

98,387
210,116
5,763,081

Treasury stock

(35,532)

(26,091)

(567,000)

(89,971)

Capital surplus
Other stockholders' equity
Total stockholders' equity
Total liabilities and stockholders'
equity

1,851,604
(120,426)
3,584,022

3,071,255
(576,131)
4,206,320

7,645,000
1,277,000
13,944,000

9,335,415

12,365,629

29,343,000

4,170,164
(438,926)
9,712,851
17,853,09
7

5,000
5,816,000
(2,824,00
0)
3,996,000
1,038,000
8,031,000
17,858,00
0

Liabilities
Current Liabilities
Accounts payable
Short/Current long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other liabilities
Deferred long-term liability charges
Total Liabilities
Stockholders' Equity
Preferred stock
Common stock
Retained earnings

Other Financial Data

Exploration expenses
Shares Outstanding
Year-end Closing Price

363,000
34.86

344,000
38.25

444,000
68.64

Market Capitalization

12,654,180

13,158,000

30,476,160

329,000
75.22
24,747,38
0

183,000
378,000
76.94
29,083,32
0

Recommendations
Thisissue(DidCOPpaytoomuch?)receivedalotofdiscussionatthetimeoftheacquisition.After
studentscompletetheanalysis,theymayconcludethatCOPpaidtoomuchforBR.Theactual
acquisitionrepresentsavaluationofBRequivalentto$92.86persharebasedonCOP'sclosingpriceon
12-9-2005,thelastunaffecteddayoftradingpriortotheacquisitionannouncement.Asshowninthe
calculations,onlythevaluationofXTO($93.18basedontheEBITDAmultiple)justifiessuchaprice.
However,allanalysesaspresenteduse2004year-endvalue.Itisimportanttonotethatsomeanalysts
forecastedEBITDAandEBITDAXgrowthratesof25-30%forBRin2005.Whiletheacquisitionprice
of$92.86stilllookshigh,itcanbejustified.Furthermore,therearesynergiestotheacquisition.COP
hasastatedgoalofincreasingitsupstreamportfolio.Also,COPhastheweakestexplorationportfolio
amongthelargestintegratedfirms,andneedstoboostitsinventory.Inthisacquisition,COPistargeting
NorthAmericannaturalgasreserve.

References

https://www.sec.gov/Archives/edgar/data/868809/000119312505216982/d10q.htm
https://www.sec.gov/Archives/edgar/data/895126/000119312505213104/d10q.htm
https://www.sec.gov/Archives/edgar/data/1090012/000095013405020387/d29899e10vq.htm
https://www.sec.gov/Archives/edgar/data/6769/000095012905010772/h29394e10vq.txt
https://www.sec.gov/Archives/edgar/data/6769/000095012905010772/h29394e10vq.txt