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ConocoPhillips to split in two; shares rise

Thu Jul 14, 2011 6:31pm EDT

* Signals shift away from ‘super-major’ strategy

* Split seen completed in first half of 2012

* CEO Mulva to retire upon completion of split

* Shares rise as much as 7.5 percent, but gains fade

* Mulva had said no to split in March (Rewrites to bring rivals higher, adds reserves graphic link and closing share price)

By Matt Daily and Anna Driver

NEW YORK/HOUSTON, July 14 (Reuters) – ConocoPhillips (COP.N) will spin off its refining arm in a bid to improve investment returns for shareholders, abandoning the bigger-is-better strategy that drove oil giants into mergers.

As an integrated oil major with exploration and production, as well as refining and marketing, ConocoPhillips ranked sixth globally and was often overshadowed by larger rivals such as Exxon Mobil (XOM.N), Royal Dutch Shell (RDSa.L) and Chevron (CVX.N).

By splitting the $107 billion Conoco into two, each unit becomes the No.1 pure play in their segments, a move the company hopes will attract new investors and boost market valuations.

Shares of Conoco initially jumped 7.5 percent on the news, but those gains faded and the stock closed up only 1.6 percent at $75.61 per share.

Some analysts welcomed the move and said it would unlock value in the exploration and production unit, which accounted for 80 percent of profit last year. But others said nothing fundamentally had changed in the business.

“I’m not a fan of these financial engineering maneuvers,” The Benchmark Co analyst Mark Gilman said. “I don’t see any incremental value associated with two separate companies.”

Conoco is the latest and biggest integrated oil company to break up, following Marathon Oil Co’s split, which was finalized on July 1. Other energy companies, such as Williams Cos (WMB.N) and El Paso Corp (EP.N) have sought split off operations to narrow their focus.

Conoco is the smallest of the oil majors that include Exxon Mobil, Royal Dutch Shell, Chevron, BP Plc (BP.L) and Total SA (TOTF.PA). Exxon and Chevron had strongly defended their integrated strategies in the past.

By splitting up, Conoco’s refining arm will become the top independent refiner in the U.S. above Valero Energy Corp (VLO.N). Similarly, its exploration and production business will become the biggest independent player in that market above Occidental Petroleum (OXY.N).

“We believe more value is created in the formation of two very clear, stand-alone companies,” said Chief Executive Jim Mulva, who will retire upon the completion of the split.

Conoco did not name new heads of the separate businesses.

The decision to split comes as confidence rises that global oil prices will remain strong for years as rising demand from China, India and other emerging markets soak up supplies.

Mulva “built this company in a different commodity price environment and different outlook,” said Barrow, Hanley, Mewhinney & Strauss Inc analyst and portfolio manager R. Lewis Ropp, “and now we have an opportunity to separate back and really get peer group multiples that are much higher than the integrated multiples investors are assigning to the company.”

The split should unlock value in the exploration and production business, which is very undervalued, said Ropp, who is a long-time owner of ConocoPhillips shares.

Raymond James analyst Stacey Hudson estimates Conoco’s two companies would have a combined value of $80 to $85 a share, or $113 billion to $120 billion.

The refining business would probably be worth about a quarter of that, Hudson said, although ConocoPhillips’ decision about where to place its pipelines and storage operation and chemical business could have an effect on the final value.


ConocoPhillips will be the first of the so-called super majors to shift away from a strategy that led the industry to consolidate into a handful of players with global reach in the oil and gas production and oil products businesses.

The announcement marks an abrupt change in the company’s views on a spin-off of its refining business. In March, Mulva was asked at an analysts’ meeting if he would consider a split as Marathon did.

He said in March: “I think for them, they’ve decided it seems to make sense and work for them. Whether that’s something that we should do, I don’t think so.”

Mulva told analysts on Thursday that the company began taking a hard look at options that included a spinoff for its refining business last fall.

In the past two years, ConocoPhillips embarked on a massive portfolio shift to sell up to $17 billion in assets and reduce its debt, while buying back shares and raising its dividend.

The plan to return cash to shareholders will continue at both companies. The exploration company will contemplate share repurchases in 2012, when the split is expected to be complete, while both companies will pay a dividend, Mulva said.

Strategies at both companies will remain the same, the executive told analysts.

ConocoPhillips’ exploration business will continue to shed mature oil and gas properties while looking to increase production and reserves that deliver good returns. The company’s refining arm will sell, shut or make joint ventures of refineries that are unable to process cheaper grades of crude oil, Mulva said.

Conoco’s oil and gas production fell more than 5 percent last year to 1.8 million barrels of oil equivalent per day, but that business provided more than 80 percent of the company’s 2010 net profit.

ConocoPhillips said the transaction does not need a shareholder vote. The spinoff is subject to market conditions, regulatory approvals and the receipt of a U.S. Internal Revenue Service ruling that approves its planned tax-free status.

The company has not decided what to do with its 50 percent stake in Chevron Phillips Chemical Co LLC, a joint venture with Chevron Corp (CVX.N).

(Additional reporting by Michael Erman, Ernest Scheyder and Roy Strom in New York, Braden Reddall in San Francisco and Krishna N Das in Bangalore; Editing by Lisa Von Ahn, Matthew Lewis and Tim Dobbyn)

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