Size is critical issue at Marathon

EnCana’s decision last week not to split itself in two has turned the energy sector’s focus on Marathon Oil, which said in July that it would also consider a split.

There are growing signs that investors and lenders favour such a move less than they did before the credit crisis intensified.

The smaller size of Marathon’s exploration and production and refining operations, if separated, could make it tougher for each business to finance itself.

This is particularly the case for the refining operations, which have substantial capital requirements and could require a multi-billion dollar working capital facility.

“This is not really an environment where you want to be going to your banks to ask them to step up with a big working capital facility,” one banker said. “I wouldn’t be surprised if they’re having trouble putting that together.”

Another banker said: “They probably won’t get the kind of attention they would want and deserve in this environment, because people are focused on putting out fires” in the financing markets.

If Marathon cannot secure the necessary financing, or say it is highly confident it could do so, a separation in the near term could prove untenable.

Marathon will also have to convince investors it will be worth more in pieces than combined.

This is at a time when the markets are valuing large, less leveraged companies more highly than smaller entities with more leverage, according to research from Tudor, Pickering, Holt & Co.

“We’re in an environment where bigger is better, there’s no doubt about that,” one energy banker said. “That’s primarily for balance sheet and credit reasons, but also because investors are less inclined to pay very high growth multiples for companies that have just one or two [oil and gas] basins.”

Marathon’s decision to announce it was considering a split could make it more vulnerable to takeover, bankers agreed. The company’s sagging share price has also turned it into a more easily digestible bite for the world’s largest oil companies.

But while the credit crunch could make a split by Marathon difficult, it might help protect it from poachers by making an unsolicited takeover tough to finance.

Marathon’s refining business has long served as a “poison pill” to deter suitors which do not want more exposure to the volatile refining sector, and sources expected that would continue to be the case unless the company split.

If a split occurs, Marathon’s more desirable upstream oil and gas business may have limited time to prove its mettle as a standalone operation if it wants to stay independent.

But at the same time, while Devon Energy and Anadarko Petroleum, two similar businesses, have been long rumoured as potential takeover targets forExxonMobil and Royal Dutch Shell, those deals have not yet occurred.

Marathon said it would decide this quarter whether to execute the split.

When that decision is made, credit market conditions might also dictate whether it would execute a straight spin-off of the refining business or pursue another structure to execute the plan.

EDITOR’S CHOICE