Burlington Resources Inc. (BR) Zac Conley
Date: Jan. 25th, 2005 Consensus Estimate 12/03A 12/04E 12/05E
Sector: Oil & Gas EPS 3.88 4.00 3.91
Industry: Oil & Gas Producers P/E 11.29 10.94 11.91
Current Price: $43.77 Long Term Growth Rate: 8.10%
52 Wk Price Range: $26.33-46.41 Ratio Analysis Co. Indus. Sector SP500
Ave. Daily Vol: 2,570,360 P/E (TTM) 11.29 16.09 18.61 22.04
Beta: .54 P/S (TTM) 3.34 2.85 1.96 3.04
Market Cap ($million): 17,140 P/B (MRQ) 2.62 2.75 3.21 4.01
Shares Out (million): 391.5 ROA (TTM) 11.17 6.91 9.18 7.42
Inst. Hold %: 83% EBO Valuation $214.54
Div Yld: .78 Recommendation: Buy
Total Debt/Equity: N/A Stop-loss Price: $35.00
Member S&P 500? Yes (.16%) Price 6-mo prob 12-mo prob
Target Price $48.00 68% 79%
Investment Thesis Summary
• With their ability to replenish their reserves Fundamental Valuation:
for the year, stability is there for the Bullish: With the industry ROE the price is near
company. This should result in continued four times greater than original price. When
rising stock price. using the S&P’s ROE of 13% we still get a
• Burlington Resources is planning to valuation of nearly double the current price.
repurchase $1 billion dollars worth of stock
in the near future. Their confidence in their Relative Valuation:
stock should also help drive up the price. Bullish: With all but one indicator pointing to
• Their ability to increase their revenues in bullish, the stock seems cheap and low in risk.
their crude oil branch has helped diversify
and increase their reserve cash. Technical Analysis:
Bearish: The graphs were, for the majority,
• Increased revenues in sections other than
bearish. Indicators suggest the stock price will
natural gas should continue. Through this,
drop in the near future.
company strength should improve and drive
the price upward.
• In comparison to the competition, Bearish: Analysts forecast earnings to drop in
Burlington Resources seems to be a cheaper the coming quarters. Downward revisions also
stock. Couple this with the stock buy back dominate.
and price should be favorably reflected.
• Fundamental valuation shows the stock is a Analyst Recommendations:
very good value. When lowering the ROE Bullish: The average rating is at its lowest for
from 26.33% (industry average) to 13% the year. From the last month there is an
(S&P average) the stock is still priced at a additional buy and has two less holds.
Bullish: Institutions hold 83% of the shares.
This shows institutions want to hold their stock.
In the last three months there have been more
buyers than sellers.
Burlington Resources Inc. is heavily concentrated in the natural gas area (69%), with additional, and smaller
operations in natural gas liquids (17%), and crude oil (14%). Their major operations in North America are
conducted in the US Gulf, up through the Rocky Mountains and also in parts of Canada. They also have
international operations in Northwest Europe, North Africa, China and South America. These areas are
operated, and ran by the five different divisions of Burlington Resources, Burlington Oil & Gas Company
LP, The Louisiana Land and Exploration Company, Burlington Resources Canada and Affiliated companies.
Burlington Resources has been very successful diversifying themselves by revenues within their division. Last
year they relied on natural gas for 78% of their income, compared to just 69% of revenue this year. Although
the percentage is down the gross revenue is up by over two hundred million dollars in natural gas. The
reason for such diversification lies within the crude oil revenue section. Revenue in this area more than
doubled in gross revenue and in percentages.
Competition and Strategy
Burlington Resources has three major competitors in Anadarko Petroleum Corp, British Petroleum and
Devon Energy Corp. Anadarko Petroleum is the most direct competitor to Burlington Resources. They
have fields in nearly all the same areas, and are involved in all three of Burlington Resources major sections,
natural gas, natural gas liquids and crude oil. They have recently built a pipeline to British Columbia that
sends approximately nine million cubic feet per day. On the other hand, Anadarko is finding it hard to
finance their drilling expenses after their budget was made in November. Oil prices dipping have cut profits,
while expenses rise. This could be an advantage for Burlington Resources due to their efficient nature.
British Petroleum is the largest producer of natural gas, which makes them an immediate competitor to
Burlington Resources. Mad Dog Co., a company British Petroleum has a 60% working interest in, just
opened a new oil field in the Gulf of Mexico, just south of Louisiana. Although a new field is opening, this
should not be a big threat since British Petroleum is roughly twenty-five times bigger than them and opening
new fields is what they do. Another of the competitors, Devon Energy, has a similar revenue stream as
Burlington Resources. The majority of their income comes from natural gas, and is also heavily based in the
United States. Also, like British Petroleum, they have just launched a new field in the Gulf of Mexico named
Red Hawk. This is not a sole ownership though, they have partnered with Kerr McGee Corp. to open this
Although other companies have opened fields, Burlington Resources is trying to stay efficient and make the
most out of each project and activity. They have announced a one billion dollar stock repurchase, and have
projected to have full reserve replacement. A representative from Burlington Resources also talked at the
Goldman Sachs Global Energy Conference. A panel will discuss the ability to sustain shareholder growth.
Even if no new fields have recently been opened, their current fields are strong holds for their supply and
give them a natural competitive advantage. Their success will depend on their ability to sustain shareholder
growth and becoming more efficient within the company.
Historical Revenue and Earnings:
Historical Revenue Historical Earnings
FY 12/04 FY 12/03 FY 12/02 FY 12/04 FY 12/03 FY 12/02
1st Quarter 1,308 1,128 683 .89 .81 .12
2nd Quarter 1,333 1,059 769 .96 .69 .42
3rd Quarter 1,419 1,059 630 1.00 .67 .20
4th Quarter 1,558 1,065 882 1.02 .98 .39
Total 5,618 4,311 2,964 3.87 3.15 1.13
In the last three years, Burlington Resources has shown consistent increases from year to year. Within the
last year they have shown improvement from quarter to quarter. As far as the earnings go, Burlington
Resources has also seen increases from year to year and increases in each quarter for the last year.
I. Fundamental Valuation
1. EPS Forecasts and long-term growth rate (LTG) EPS is $4.00 and $3.91 with a growth rate of 8.10%
2. Book value per share derived from…
3. Discount rate: 6.06%
4. Dividend payout ratio 8.02%
5. Next fiscal year-end is 2005
6. Current fiscal month is 1
7. Target ROE=26.33%
Output and Sensitivity Analysis:
1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
valuation is $214.54
2. Changing the discount rate to 14% gives you a value of $44.09. This is the return you should expect
on the stock.
3. Changing the growth rate to negative 210.5 and you will come close to the actual price of the stock.
4. Changing the industry ROE to thirteen percent gives you nearly double the actual price. This
number is the ROE of the Standard and Poor’s 500. Using this gives you a more realistic
interpretation of the stocks value because of the price per barrel of oil has increased by so much
II. Relative Valuation
P/E Bullish: Relatively a low P/E compared to its competitors. In this case it means they
have a cheap priced stock.
PEG (P/E/G) Bullish: Their low PEG ratio tells us it is cheap for its growth rate and is undervalued.
P/B Neutral: Burlington Resources’ P/B is average for the industry and thus gives no
Value (P/B/ROE) Bullish: The low Value indicates their stock is low in risk and is cheap.
P/S Bullish: They have the highest P/S of their competitors telling us their profit margin is
high, and is low in risk.
Summary Nearly every indicator is bullish. Signs are pointing toward Burlington Resources
having low risk and being priced cheaper than their competitors.
III. Technical Analysis
Bollinger Bands Bearish: The price is sloping downward. When coupled with a majority of other
bearish signs, causes the Bollinger band to be bearish as well.
Stochastics Bearish: %K is above the %D, but the gap is shrinking.
Moving Averages Bearish: The price is above the moving average, but the gap is quickly decreasing.
MACD Bullish: MACD is above the signal line and it is also above zero.
Regression Bearish: The price is above the trend line, but is sloping downward.
PriceROC Bearish: Price is below where it was 100 days ago, and it is trending downward.
IV. Earnings Analysis
Dec. 04 Sep. 04 Jun. 04 Mar. 04 Dec. 03
(Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior)
Estimate 1.14 .91 .81 .81 .54
Actual 1.16 .98 .96 .89 .58
Difference .02 .07 .15 .08 .04
Mean Earnings Estimates
Mar. 05 Jun. 05 Dec. 05 Dec. 06 LT Growth
This Quarter Next Quarter This Fiscal Year Next Fiscal Rate
Earnings 1.00 .86 3.74 3.49 8.10
# Estimates 21 20 31 15 9
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Down Revised Up Revised Down
Quarter ending 03/05 0 8 1 7
Quarter ending 06/05 2 6 2 6
Year ending 12/05 1 18 2 19
Year ending 12/06 3 4 4 4
Over the last five quarters, Burlington Resources has seen an increase in earnings, and have also had five
straight quarters with positive earnings surprises. This information should have helped the stock’s price
increase during that period. However, earning estimates for the next two quarters are fourteen cents and
twenty-eight cents lower than actual earnings last quarter. Couple this with the numerous amounts of
downward revisions, and it seems to indicate the price is ready to fall in the future.
V. Analysts’ Recommendations
Current 1 Month Ago 2 Months Ago 1 Year Ago
Buy 10 9 10 7
Outperform 9 9 9 5
Hold 12 14 13 22
Underperform 0 0 0 1
Sell 0 0 0 0
No Opinion 0 0 0 0
Mean Rating 2.06 2.16 2.09 2.49
Burlington Resources’ mean rating is currently better now than it has been at any other time. In the last
month there is one more buy recommendation and two less holds, showing signs of improvement. Analysts
have not given them a sell recommendation in the last year, which is a good sign. Although, the most
recommendations are in the hold category suggesting they are still not sure on the stock.
VI. Institutional Ownership
Over the last three months there have been twenty-five more new buyers for their stock. This is a bullish
sign, even though the amount of shares bought by institutions has decreased. Even with the .6% less shares
held by institutions, the percent held is still over 80%. This change is so small, a bullish sign should still be
taken from the information provided by the institutional ownership spreadsheet.