Item 8.01 Other Events. As previously disclosed, onOctober 18, 2020 ,ConocoPhillips , aDelaware corporation ("ConocoPhillips") entered into the Agreement and Plan of Merger, dated as ofOctober 18, 2020 (the "Merger Agreement") with Concho Resources Inc., aDelaware corporation ("Concho") andFalcon Merger Sub Corp. , aDelaware corporation and wholly-owned subsidiary ofConocoPhillips ("Merger Sub"). Pursuant to the Merger Agreement, Concho will merge with and into Merger Sub, with Concho continuing as the surviving entity (the "Merger"). OnDecember 11, 2020 , each ofConocoPhillips and Concho filed with theSecurities and Exchange Commission (the "SEC") a definitive joint proxy statement/prospectus (the "Definitive Proxy Statement") with respect to the respective special meetings ofConocoPhillips and Concho stockholders scheduled to be held onJanuary 15, 2021 in connection with the Merger (the "Special Meeting").
Litigation Related to the Merger
In connection with the Merger, seven lawsuits were filedbetween November 23 and December 28, 2020 against one or more of Concho, the directors of Concho,ConocoPhillips , the directors ofConocoPhillips and Merger Sub (collectively, the "Defendants"). Four complaints, Stein v. Concho Resources Inc. et al., C.A. No. 1:20-cv-01582-UNA, Chappidi v. Concho Resources Inc. et al., C.A. No. 1:20-cv-01584-UNA, Lovoi v.ConocoPhillips et al., C.A. No. 1:20-cv-01638-UNA and Davydov v.ConocoPhillips et al., C.A. No. 1:20-cv-01674-UNA (the "Davydov lawsuit"), were filed in theU.S. District Court for the District of Delaware . One complaint, Ortiz v. Concho Resources Inc. et al., C.A. No. 1:20-cv-05886, was filed in theU.S. District Court for the Eastern District of New York . One complaint, Stracener v.ConocoPhillips et al., C.A. No. 1:20-cv-10954, was filed in theU.S. District Court for the Southern District of New York . One complaint, Garfield v. Bunch et al., No. 2020-79700, was filed in theDistrict Court of Harris County, Texas (the "Garfield lawsuit").
The complaints filed in federal court generally allege, among other things, that the Defendants disseminated a false or misleading registration statement regarding the proposed Merger in violation of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 14a-9 promulgated thereunder. These complaints allege that the preliminary joint proxy statement/prospectus or the Definitive Proxy Statement filed byConocoPhillips misstated or omitted material information regarding the parties' financial projections, the analyses performed by Concho's andConocoPhillips' respective financial advisors, potential conflicts of interest involving Concho's andConocoPhillips' respective financial advisors and/or the sales process leading up to the Merger, and that disclosure of material information is necessary for Concho's andConocoPhillips' stockholders to make informed decisions regarding whether to vote in favor of the Merger or the issuance of shares ofConocoPhillips common stock in connection with the Merger (the "Share Issuance"). Other than the Davydov lawsuit, the complaints further allege that Concho's orConocoPhillips' directors and/orConocoPhillips are liable for alleged violations as "controlling persons" of Concho andConocoPhillips under Section 20(a) of the Exchange Act. The Garfield lawsuit alleges, among other things, thatConocoPhillips and the directors ofConocoPhillips disseminated a Definitive Proxy Statement that contains materially false and misleading statements and omissions in violation ofTexas common law. The complaint alleges that the Definitive Proxy Statement included false or misleading statements regarding conflicts of interests of those promoting the Merger, as well as financial information underlying the analyses conducted byConocoPhillips' financial advisor in formulating its fairness opinion, and that disclosure of material information is necessary forConocoPhillips' stockholders to make informed decisions regarding whether to vote in favor of the Share Issuance. Among other relief, the complaints seek injunctive relief, including enjoining the Merger unless and until the Defendants disclose the allegedly omitted material information, rescinding the Merger in the event the Defendants consummate the Merger (or awarding rescissory damages), damages, and an award of attorneys' and experts' fees.ConocoPhillips and Concho believe that the claims in the complaints are without merit and that no further disclosure is required under applicable law.
As a result of supplemental disclosures set forth herein, the plaintiff in the Garfield lawsuit has entered into an agreement to voluntarily dismiss his action with prejudice.
Supplemental Disclosures to Definitive Proxy Statement
This supplemental information to the Definitive Proxy Statement should be read in conjunction with the Definitive Proxy Statement, which should be read in its entirety. Nothing herein shall be deemed an admission of the legal necessity or materiality of any of the disclosures set forth herein. All page references in the information below are to pages in the Definitive Proxy Statement, and all terms used but not defined below shall have the meanings set forth in the Definitive Proxy Statement. The following underlined language is added to the second full paragraph in the section of the Definitive Proxy Statement entitled "The Merger-Opinion of Goldman Sachs,ConocoPhillips' Financial Advisor-Illustrative Discounted Cash Flow Analysis-Concho Standalone" that appears on pages 94-95. Using discount rates ranging from 5.5% to 7.5%, reflecting estimates of Concho's weighted average cost of capital, Goldman Sachs discounted to present value as ofJune 30, 2020 (i) estimates of the unlevered free cash flows to be generated by Concho on a standalone basis for the period fromJune 30, 2020 toDecember 31, 2025 , as reflected in the forecasts for Concho, and (ii) a range of illustrative terminal values for Concho as ofDecember 31, 2025 , calculated by applying perpetuity growth rates ranging from (0.5)% to 0.5% to the estimate of the terminal year unlevered free cash flow of Concho, as reflected in the forecasts for Concho (which analysis implied multiples of the implied terminal values derived for Concho to estimated earnings before interest, taxes, depreciation, and amortization expense (which we refer to as "EBITDA") for Concho, as reflected in the forecasts for Concho, for 2025, ranging from 3.9x to 6.3x). Goldman Sachs derived the discount rates referenced above by application of the capital asset pricing model (which we refer to as "CAPM"), which requires certain company-specific inputs, including the company's target capital structure weightings, the cost of long-term debt, future applicable marginal cash tax rate and a beta for the company, as well as certain financial metrics forthe United States financial markets generally. The range of perpetuity growth rates was estimated by Goldman Sachs utilizing its professional judgment and experience, taking into account the forecasts for Concho on a standalone basis and market expectations regarding long-term real growth of gross domestic product and inflation. Goldman Sachs derived a range of illustrative enterprise values for Concho by adding the ranges of present values it derived as described above. Goldman Sachs then subtracted from the range of illustrative enterprise values it derived the net debt of Concho as ofJune 30, 2020 , as reflected in Concho's consolidated balance sheet as of that date, adjusted by approximately$100 million to reflect Concho's public offering of its 2.400% Senior Notes inAugust 2020 and redemption of its 4.375% Senior Notes inSeptember 2020 , to derive a range of illustrative equity values for Concho. Goldman Sachs then divided the range of illustrative equity values it derived for Concho on a standalone basis by the fully diluted shares of Concho common stock outstanding as ofOctober 16, 2020 , calculated based on equity information provided by Concho management and approved for standalone basis, for 2025, ranging from 4.3x to 7.3x). Goldman Sachs derived the discount rates referenced above by application of CAPM. The range of perpetuity growth rates was estimated by Goldman Sachs utilizing its professional judgment and experience, taking into account the forecasts forConocoPhillips on a standalone basis and market expectations regarding long-term real growth of gross domestic product and inflation. The following underlined language is added to the first full paragraph in the section of the Definitive Proxy Statement entitled "The Merger-Opinion of Credit Suisse, Concho's Financial Advisor-Selected Company Analysis" that appears
on pages 107-108.
Credit Suisse considered certain financial data for Concho,ConocoPhillips and selected companies with publicly traded equity securities Credit Suisse deemed relevant. The selected companies were selected because they were deemed to be similar to Concho andConocoPhillips in one or more respects. For purposes of these analyses, (1) Credit Suisse was directed by Concho to use theConcho projections (Case A) and theConcho projections forConocoPhillips (Case A) given that the scenarios contemplated by Case A were considered byConcho management to most closely resemble then current market conditions and near-term production growth profiles, (2) except as otherwise noted, share prices for the selected companies were closing prices as ofOctober 16, 2020 and (3) estimates of future financial performance for the selected companies for the years endingDecember 31, 2021 and 2022 used to select the implied multiple ranges were based on publicly available research analyst estimates for those companies.
The following underlined language is added to the first two full paragraphs in the section of the Definitive Proxy Statement entitled "The Merger-Opinion of Credit Suisse,Concho's Financial Advisor-Discounted Cash Flow Analysis" that appear on pages 109-110.Concho . Credit Suisse performed a discounted cash flow analysis with respect toConcho by calculating the estimated net present value of the projected after-tax, unlevered, free cash flows ofConcho based on each of the four cases described above comprising theConcho projections. Credit Suisse applied, based on its professional judgment and experience, terminal multiples of 5.0x-6.0x toConcho's estimated EBITDAX for the year endedDecember 31, 2030 based on each case of theConcho projections to estimate a range of terminal values and discount rates ranging from 9.0% to 11.0% to the projected unlevered free cash flows and calculated terminal values. Credit Suisse derived ranges of illustrative enterprise values forConcho for each case by adding the ranges of present values it derived as described above. Credit Suisse then subtracted, from the ranges of illustrative enterprise values it derived, as directed byConcho management, estimates of applicable corporate adjustments, including net debt, ofConcho as ofDecember 31, 2020 provided byConcho management. Credit Suisse derived the discount rates referenced above, reflecting estimates of weighted average cost of capital forConcho , by application of the capital asset pricing model. The discounted cash flow analysis forConcho indicated implied reference ranges per share ofConcho common stock of$38.37 to$54.74 for Case A,$93.23 to 121.69 for Case B,$28.22 to$38.55 for Case C, and$67.38 to$85.15 for Case D.ConocoPhillips . Credit Suisse performed a discounted cash flow analysis with respect toConocoPhillips by calculating the estimated net present value of the projected after-tax, unlevered, free cash flows ofConocoPhillips based on each of the four cases described above comprising theConcho projections forConocoPhillips . Credit Suisse applied, based on its professional judgment and experience, terminal multiples of 6.0x- 7.0x toConocoPhillips' estimated EBITDAX for the year endedDecember 31, 2030 based on each case of theConcho projections forConocoPhillips to estimate a range of terminal values and discount rates ranging from 8.0% to 10.0% to the projected unlevered free cash flows and calculated terminal values. Credit Suisse derived ranges of illustrative enterprise values forConocoPhillips for each case by adding the ranges of present values it derived as described above. Credit Suisse then subtracted, from the ranges of illustrative enterprise values it derived, as directed byConcho management, estimates of applicable corporate adjustments, including net debt, ofConocoPhillips as ofDecember 31, 2020 provided byConocoPhillips management. Credit Suisse derived the discount rates referenced above, reflecting estimates of weighted average cost of capital forConocoPhillips , by application of the capital asset pricing model. The discounted cash flow analysis forConocoPhillips indicated implied reference ranges per share ofConocoPhillips common stock of$24.48 to$33.07 for Case A,$62.94 to$78.33 for Case B,$20.15 to$26.60 for Case C, and$53.27 to$64.98 for CaseD. While theConocoPhillips projections were based on differing oil price and production growth assumptions than theConcho projections forConocoPhillips and consequently were not directly comparable to theConcho projections forConocoPhillips , Credit Suisse also performed a discounted cash flow analysis with respect toConocoPhillips based on theConocoPhillips projections using terminal multiples of 6.0x to 7.0x and discount rates ranging from 8.0% to 10.0%, which indicated an implied reference range per share ofConocoPhillips common stock of$52.19 and$65.97 . The following underlined language is added to, and the crossed out language is deleted from, the last full paragraph in the section of the Definitive Proxy Statement entitled "The Merger-Opinion of Credit Suisse,Concho's Financial Advisor-Other Matters" that appears on page 111. Credit Suisse and its affiliates have in the past provided and currently are providing investment banking and other financial advice and services toConcho and its affiliates for which advice and services Credit Suisse and its affiliates have received and would expect to receive compensation, including, among other things, during the past two years two-year period preceding delivery of its opinion, having acted as a senior co-manager in connection with the public offering of debt securities byConcho in 2020 and being a participant and lender under outstanding credit facilities, for which Credit Suisse and its affiliates received approximately$220,0001,850 ,000in fees, interest and related income. Credit Suisse and its affiliates have in the past provided investment banking and other financial advice and services toConocoPhillips and its affiliates for which advice and services Credit Suisse and its affiliates have received compensation, including, among other things, during the past two years two-year period preceding delivery of its opinion, having acted as a financial intermediary in connection with a repurchase ofConocoPhillips common stock byConocoPhillips in 2020 and being a participant and lender under outstanding credit facilities, for which Credit Suisse and its affiliates received approximately$210,000750 ,000in fees, interest and related income. Credit Suisse and its affiliates may in the future provide investment banking and other financial advice and services toConcho ,ConocoPhillips and their respective affiliates for which advice and services Credit Suisse and its affiliates would expect to receive compensation. Credit Suisse is a full service securities firm engaged in securities trading and brokerage activities as well as providing investment banking and other financial advice and services. Credit Suisse and its affiliates are also participants and lenders under outstanding credit facilities ofConcho andConocoPhillips and/or certain of their respective affiliates. In the ordinary course of business, Credit Suisse and its affiliates may acquire, hold or sell, for its and its affiliates' own accounts and the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) ofConcho ,ConocoPhillips and any other company that may be involved in the merger, as well as provide investment banking and other financial advice and services to such companies and their affiliates.
The following underlined language is added to, and the crossed out language is deleted from, the third and fourth full paragraphs in the section of the Definitive Proxy Statement entitled "The Merger-Opinion of J.P. Morgan,Concho's Financial Advisor-Discounted Cash Flow Analysis" that appear on page 118.Concho . The unlevered free cash flows and the range of terminal values forConcho were discounted to present values using a range of discount rates from 10.5% to 12.5%. These J.P. Morgan derived ranges of illustrative enterprise values forConcho for each case by adding the ranges of present values it derived as described above. J.P. Morgan then subtracted, from the ranges of illustrative enterprise values it derived, as directed byConcho management, estimates of applicable corporate adjustments, including net debt, ofConcho as ofDecember 31, 2020 provided byConcho management. The discount rates were chosen by J.P. Morgan based upon its professional judgment and experience and an analysis, using the capital asset pricing model, of the weighted average cost of capital ofConcho . The discounted cash flow analysis forConcho indicated implied reference ranges, rounded to the nearest$0.25 per share ofConcho common stock of$24.00 to$37.50 for Case A,$76.75 to$106.75 for Case B,$17.50 to$24.75 for Case C, and$53.75 to$69.50 for Case D.ConocoPhillips . The unlevered free cash flows and the range of terminal values forConocoPhillips were discounted to present values using a range of discount rates from 9.75% to 11.75%. These J.P. Morgan derived ranges of illustrative enterprise values forConocoPhillips for each case by adding the ranges of present values it derived as described above. J.P. Morgan then subtracted, from the ranges of illustrative enterprise values it derived, as directed byConcho management, estimates of applicable corporate adjustments, including net debt, ofConocoPhillips as ofDecember 31, 2020 provided byConocoPhillips management. The discount rates were chosen by J.P. Morgan based upon its professional judgment and experience and an analysis, using the capital asset pricing model, of the weighted average cost of capital ofConocoPhillips . The discounted cash flow analysis forConocoPhillips indicated implied reference ranges per share, rounded to the nearest$0.25 , ofConocoPhillips common stock of$15.75 to$24.00 for Case A,$54.25 to$73.25 for Case B,$12.50 to$17.75 for Case C, and$45.00 to$57.50 for Case D. The following underlined language is added to the last full paragraph in the section of the Definitive Proxy Statement entitled "The Merger-Opinion of J.P. Morgan,Concho's Financial Advisor-Miscellaneous" that appears on pages 119-120. For services rendered in connection with the merger and the delivery of its opinion,Concho has agreed to pay J.P. Morgan a transaction fee of$25 million , of which$2 million became payable byConcho to J.P. Morgan in connection with J.P. Morgan's delivery of its opinion and the balance of which becomes payable upon the closing of the merger. In addition,Concho has agreed to reimburse J.P. Morgan for its expenses incurred in connection with its services, including the fees and disbursements of counsel and to indemnify J.P. Morgan against certain liabilities arising out of J.P. Morgan's engagement. During the two years preceding the date of J.P. Morgan's opinion, J.P. Morgan and its affiliates have had, and continue to have, commercial or investment banking relationships withConcho andConocoPhillips , for which J.P. Morgan and its affiliates have received customary compensation. Such services during such period include having acted as joint lead bookrunner onConcho's offering of debt securities, which closed inAugust 2020 , and as financial advisor toConocoPhillips in a divestiture which closed inOctober 2018 . In addition, J.P. Morgan's commercial banking affiliate is an agent bank and a lender under outstanding credit facilities ofConcho andConocoPhillips , for which it receives customary compensation or other financial benefits. In addition, J.P. Morgan and its affiliates hold, on a proprietary basis, less than 1% of the outstanding common stock of each ofConcho andConocoPhillips . During the two-year period preceding delivery of its opinion, the aggregate fees recognized by J.P. Morgan (including fees recognized by its affiliate for acting as an agent bank and lender) fromConcho were approximately$712,000 and fromConocoPhillips were approximately$2.8 million . In the ordinary course of their businesses, J.P. Morgan and its affiliates may actively trade the debt and equity securities or financial instruments (including derivatives, bank loans or other obligations) ofConcho orConocoPhillips for their own accounts or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities or other financial instruments.
The following underlined language is added as a footnote to the second table in the section of the Definitive Proxy Statement entitled "The Merger-ConocoPhillips Unaudited Forecasted Financial Information-Summary of ConocoPhillips Forecasted Financial Information" that appears on page 122.
Quarterly Q3 Q4 Yearly 2020E 2020E 2021E 2022E 2023E 2024E 2025E Daily Production (Mboe/d) 1,053 1,141 1,225 1,288 1,376 1,460 1,551 EBITDAX$ 1,226 $ 1,520 $ 7,503 $ 10,054 $ 11,959 $ 12,859 $ 13,857 Cash Provided by Operating Activities$ 868 $ 1,275 $ 6,207 $ 8,075 $ 9,910 $ 10,553 $ 11,039 Capital Expenditures and Investments$ (1,132 ) $ (1,127 ) $ (5,011 ) $ (5,325 ) $ (6,336 ) $ (6,386 ) $ (7,008 ) Levered Free Cash Flow- Pre Dividends / Other$ (157 ) $ 377 $ 1,237 $ 2,972 $ 3,710 $ 4,235 $ 4,070 Levered Free Cash Flow- Post Dividends / Other$ (334 ) $ (1,103 ) $ (609 ) $ 1,053 $ 1,714 $ 2,159 $ 1,911 Unlevered Free Cash Flow1$ 43 $ 585 $ 2,039 $ 3,799 $ 4,294 $ 4,763 $ 4,522
(1) Unlevered free cash flow was calculated as EBITDAX, less exploration expenses, levered taxes, interest tax shield, and changes in net working capital, plus dry hole expense, accretion of asset retirement obligations ("AROs"), undistributed equity earnings and deferred taxes, less capital expenditures, cash from investment accounts, collection of advances / loans-related parties, and effect of exchange rate changes.
The following underlined language is added as a footnote to the third table in the section of the Definitive Proxy Statement entitled "The Merger-ConocoPhillips Unaudited Forecasted Financial Information-Summary of ConocoPhillips Forecasted Financial Information" that appears on page 123.
Quarterly Q3 Q4 Yearly 2020E 2020E 2021E 2022E 2023E 2024E 2025E Daily Production (Mboe/d) 1,373 1,449 1,529 1,592 1,699 1,823 1,966 EBITDAX$ 1,951 $ 2,159 $ 9,851 $ 12,925 $ 15,165 $ 16,498 $ 18,085 Cash Provided by Operating Activities$ 1,536 $ 1,879 $ 8,402 $ 10,795 $ 12,926 $ 14,006 $ 15,086 Capital Expenditures and Investments$ (1,416 ) $ (1,481 ) $ (6,459 ) $ (6,864 ) $ (8,171 ) $ (8,681 ) $ (9,656 ) Levered Free Cash Flow- Pre Dividends / Other$ 227 $ 628 $ 1,985 $ 4,154 $ 4,891 $ 5,392 $ 5,468 Levered Free Cash Flow- Post Dividends / Other$ 11 $ (225 ) $ (352 ) $ 1,724 $ 2,364 $ 2,764 $ 2,735 Unlevered Free Cash Flow1$ 484 $ 870 $ 2,953 $ 5,146 $ 5,641 $ 6,087 $ 6,086 (1) Unlevered free cash flow was calculated as EBITDAX, less exploration expenses, levered taxes, interest tax shield, and changes in net working capital, plus dry hole expense, accretion of AROs, undistributed equity earnings and deferred taxes, less capital expenditures, cash from investment accounts, collection of advances / loans-related parties, and effect of exchange rate
changes.
The following underlined language is added as a footnote to the fourth table in the section of the Definitive Proxy Statement entitled "The Merger-ConocoPhillips Unaudited Forecasted Financial Information-Summary of ConocoPhillips Forecasted Financial Information" that appears on page 123.
Quarterly Q3 Q4 Yearly 2020E 2020E 2021E 2022E 2023E 2024E 2025E Daily Production (Mboe/d) 320 308 304 304 323 363 415 EBITDAX$ 725 $ 639 $ 2,313 $ 2,671 $ 3,006 $ 3,438 $ 4,028 Cash Provided by Operating Activities$ 668 $ 605 $ 2,160 $ 2,520 $ 2,858 $ 3,295 $ 3,889 Capital Expenditures and Investments$ (284 ) $ (354 ) $ (1,498 ) $ (1,688 ) $ (1,985 ) $ (2,446 ) $ (2,799 ) Levered Free Cash Flow- Pre Dividends / Other$ 384 $ 251 $ 662 $ 831 $ 873 $ 849 $ 1,090 Levered Free Cash Flow- Post Dividends / Other$ 274 $ 211 $ 505 $ 674 $ 715 $ 692 $ 933 Unlevered Free Cash Flow1$ 441 $ 285 $ 828 $ 997 $ 1,039 $ 1,015 $ 1,256
(1) Unlevered free cash flow was calculated as EBITDAX, less exploration expenses, taxes, changes in net working capital, and capital expenditures, plus accretion of AROs.
Forward-Looking Statements
This communication relates to a proposed business combination transaction betweenConocoPhillips andConcho . Forward-looking statements relate to future events and anticipated financial position, business strategy, budgets, projected revenues, projected costs and plans, objectives of management for future operations, the anticipated benefits of the proposed transaction, the anticipated impact of the proposed transaction on the combined company's business and future financial and operating results, the expected amount and the timing of synergies from the proposed transaction, and the anticipated closing date for the proposed transaction. Words and phrases such as "anticipate," "estimate," "believe," "budget," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions can be used to identify forward-looking statements. However, the absence of these words does not mean that the statements are not forward-looking. Where, in any forward-looking statement, the company expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to be reasonable at the time such forward-looking statement is made. However, these statements are not guarantees of future performance and involve certain risks, uncertainties and other factors beyond our control. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in the
forward-looking statements. The following important factors and uncertainties, among others, could cause actual results or events to differ materially from those described in these forward-looking statements: the impact of public health crises, including pandemics (such as COVID-19) and epidemics and any related company or government policies or actions; global and regional changes in the demand, supply, prices, differentials or other market conditions affecting oil and gas, including changes resulting from a public health crisis or from the imposition or lifting of crude oil production quotas or other actions that might be imposed byOPEC and other producing countries and the resulting company or third-party actions in response to such changes; fluctuations in crude oil, bitumen, natural gas, LNG and NGLs prices, including a prolonged decline in these prices relative to . . .
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