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ConocoPhillips To Split Refining, Production Arms

July 14, 2011

-Since the end of 2005, ConocoPhillips shares have risen 27.8%, compared with Exxon Mobil and Chevron, up 46.8% and 85.12%, respectively.

– Blow to legacy of CEO Jim Mulva, who said he’ll retire once the separation is complete.

– Analysts: Conoco may have felt spinning off downstream assets a more immediate way to boost share price than continuing to try to sell refineries at prices buyers seem unwilling to pay.

– UBS analysts said split unlikely to unlock meaningful incremental value.

(Rewrites first paragraph, adds analyst comments and historical share price performance and background throughout story.)

By Isabel Ordonez


HOUSTON (Dow Jones)–U.S. oil giant ConocoPhillips said it will split its refining and production arms into two publicly traded corporations, becoming the largest energy company to date to reject the industry’s traditional bigger is better business model.

Houston-based ConocoPhillips said it plans to separate its oil and gas exploration and production business from its refining and marketing arm. It is the latest energy company to announce such a move, following the lead of Marathon Oil Corp., El Paso Corp. and Williams Cos. among others.

ConocoPhillips’s decision to split a company with 29,600 employees and $160 billion of assets deals a blow to the legacy of Chief Executive Jim Mulva, who said he will retire once the separation is complete. Mulva was the architect of a series of deals meant to broaden the company’s international reach and to diversify its portfolio of assets, but many of these transactions were ill-timed and some were later unwound. Mulva has said previously he plans on retiring next year.

Unlike its larger rivals Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), ConocoPhillips embarked in an asset acquisition spree when oil and gas prices where high, and accumulated many noncore assets that eventually weighed on its profitability.

Mulva, who as CEO of Phillips Petroleum Co. engineered the 2002 merger that created ConocoPhillips, oversaw six years of aggressive deal making. On his watch, Conoco bought a 20% stake in Russian oil producer OAO Lukoil Holdings in 2004, U.S. gas producer Burlington Resources for $35 billion in 2006 and paid $8 billion to join an Australian liquefied-natural-gas venture in 2008.

Those deals vaulted Conoco into the ranks of the world’s largest oil companies, but they left it with far more debt than its competitors. That left Conoco vulnerable when energy prices tumbled in late 2008. While larger rivals like Exxon Mobil and BP PLC took advantage of the downturn to buy assets from weaker competitors, Conoco slashed spending and laid off workers.

“They’ve bought high and sold low,” said Philip Weiss, an energy analyst at Argus Research.

Since the end of 2005, ConocoPhillips shares have risen 27.8%, compared with shares of Exxon Mobil and Chevron, which increased by 46.8% and 85.12%, respectively.

“We came to the conclusion that [the split] was the best way to create value to our shareholders,” Mulva said in a webcast conference call with investors.

Some analysts have speculated that a split was in the works after Mulva said at the company’s March analyst meeting that a spinoff was under consideration.

Deutsche Bank analyst Paul Sankey said in an note to clients then that Mulva was “highly motivated” to go forward with the split due to his “stock ownership.” Any significant boost in Conoco’s shares value will translate in a higher retirement package for Mulva.

The separation, which doesn’t require a shareholder vote, needs approval from the Internal Revenue Service, among other regulatory bodies. It is scheduled to be completed in the first half of 2012.

Announcing the move is the most radical step ConocoPhillips has taken in the last two years in order to boost the value of its shares. After racking up assets, the company in 2009 launched a sale of $10 billion in noncore assets in order to shore up its debt-ridden finances and try to please investors that have sold the stock and switch its investment to smaller oil producers with higher growth potential. The program, which was scheduled to be completed this year, was extended in March.

ConocoPhillips may have felt that spinning off its downstream assets was a more immediate way to boost its share price than continuing to try to sell refineries at prices buyers seem unwilling to pay, said Cory Garcia, analyst at Raymond James.

“Any asset sale would probably have been at half (the price) of what they wanted. So the best value-adding possibility would have been to spin it off as a separate public company,” Garcia said.

Plans to sell these noncore assets, including low-margin refining operations, will continue amid the split. The company also will continue with its plan to spend about $11 billion in share repurchases this year and continue paying its dividend at the same level, Mulva said.

As a standalone entity, ConocoPhillips’s network of oil refineries, which process crude oil into useful products like gasoline and diesel, would be one of the largest in the U.S., on par with that of Valero Corp., and be able to refine 2 million barrels of oil a day.

The split will also create the largest U.S. independent oil-and-gas producer with daily output of close to 2 million barrels of oil per day, which is about three times bigger than that of Occidental Petroleum Corp. (OXY).

But some are skeptical. UBS analysts said it is unlikely to unlock meaningful incremental value because its stock is already trading at premium compared to peers, and its refining assets are less attractive than other refining companies.

Others said the move could shake up the integrated business model for other big oil companies.

Oil giants such as Exxon Mobil, Chevron and ConocoPhillips arose out of the ashes of Rockefeller’s Standard Oil, an oil monopoly broken up by the U.S. Supreme Court in 1911.

While petroleum-product demand was rapidly growing, the integrated model appealed to investors. However, much of growth in fuel demand has shifted to Asia, and refiners there have seen profits in that segment grow. Both Chevron and Exxon Mobil have refining assets in Asia.

Meanwhile, refineries in the U.S. were left with excess capacity. Currently, 88% of capacity is being utilized as of the week of July 8, according to the U.S. Department of Energy. At its peak, the refining industry run near 100% in the summer 1998.

“It remains to be seen if Conoco’s aggressive move triggers deeper changes in its rivals,” said Fadel Gheit, an analyst with Oppenheimer.

Mulva said factors that made the integrated model valuable in the past have changed.

“In the past, the view was that been integrated will lead you to have access to better investment opportunities. We think that has changed,” Mulva said.

The split will give shareholders the opportunity to choose for themselves whether they want to invest in the refining business or not, he added.

“If you look at the integrated company, I think that downstream part was holding back on the value creation of the exploration and production business,” Mulva said. Having two companies will also help management to focus on specific areas, he added.

-By Isabel Ordonez , Dow Jones Newswires; 713-314-6090;

–Ben Lefebvre contributed to this article.



The biggest players may have assessed the case for hiving off their refining and marketing operations, but this does not mean they will do the same.

“BP has been looking at this,” said Robin West, chairman of PFC Energy, the consultancy. “But although Royal Dutch Shell, ExxonMobil and Chevron have rationalised their portfolios, they are staying in the refining business.”

These companies continue to believe in the synergies of being in both key segments of the oil business, he said.

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