ConocoPhillips, the third-largest US oil and gas group, was yesterday closing in on a deal to buy Burlington Resources for more than $30 billion (€25.1 billion), in a move to expand its production in North America. But news of the deal was greeted with scepticism on Wall Street.
James Mulva, Conoco's acquisition-prone chief executive, and Bobby Shackouls, his counterpart at Burlington, were hoping to gain approval for the takeover from the companies' directors within the next 24 hours, according to people familiar with the matter.
If sealed, the deal would be the largest in the US energy industry since November 2001, when Conoco was formed by a $25 billion merger with Phillips Petroleum.
Conoco is likely to tout the purchase as an opportunity to gain access to Burlington's vast array of natural gas assets in the continental US and Canada, where prices have been moving sharply higher in recent months.
But Wall Street investors reacted negatively to that proposition, in the absence of details from Conoco and Burlington about the terms of the deal being negotiated.
Conoco's share price was down 3 per cent to $61.19 at the close of trading yesterday on the New York Stock Exchange.
"We believe the market will struggle with the strategic logic of such a tie-up from both the perspective of timing, given current record natural gas prices and portfolio overlap, which at first glance we believe brings little to Conoco, save for scale," said a research analysts' note from Citigroup.
The analysts' note suggested there were better fits for Conoco than Burlington, which lacks significant deep-water exploration capacity - one of Conoco's weaknesses.
Others were more bullish. "Burlington is a decent acquisition for anybody who chases them," said John Olson, co-manager of Houston Energy Partner Fund. He said Conoco in recent years had made a big bet on refining and marketing and that this would rebalance the portfolio with more exploration and production.
"It is a huge bet on natural gas. This is the most lucrative part in the energy chain," said Fadel Gheit, an analyst at Oppenheimer. "The street might perceive it negatively that ConocoPhillips is paying such a premium. But I think these assets today will be worth a lot more tomorrow or next year," Mr Gheit said.
Burlington shares rose 8.23 per cent to $82.35 as investors judged that the price being discussed would not be much higher than the company's market value of $29 billion at the end of last week.
A "low-premium" deal could face opposition from Burlington shareholders campaigning for a higher price or provide room for a rival bid to be tabled.
A takeover of Burlington would cement Mr Mulva's reputation as one of the more aggressive chief executives in the energy industry. Last year, he led Conoco to the purchase of a minority stake in Russia's Lukoil, also being courted by other international oil players.
According to people familiar with the company, Conoco had been considering a range of acquisitions in recent months, and was looking closely at Canada's Talisman Energy as well as Burlington.
