ConocoPhillips Splits Refining, Production Operations into Separate Companies
[I’ve posted ad nauseam on this board about how COP’s management never seems to do anything right (e.g. #msg-61276576, #msg-48227811, #msg-42341446), and I’m skeptical that this split will accomplish anything of consequence for shareholders in the long run. However, the deal will pad CEO Jim Mulva’s retirement package, as noted below, and this may be the main impetus for his wanting the transaction. All told, Mulva is worst CEO in the history of Big Oil, IMO.]
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.
The decision deals a blow to the legacy of Chief Executive James Mulva, who was the architect of a series of deals that broadened the company's international reach and diversified its assets. But many of his deals proved ill-timed and some were later unwound.
Unlike larger rivals ExxonMobil Corp. and Chevron Corp., ConocoPhillips embarked in an asset acquisition spree when oil and gas prices where high, accumulated many assets that eventually weighed on its profitability.[That’s quite an understatement, actually.]
Mr. Mulva, who as CEO of Phillips Petroleum Co. engineered the 2002 merger that created ConocoPhillips, oversaw six years of aggressive deal making. Under 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 saddled it with far more debt than its competitors, leaving Conoco vulnerable when energy prices tumbled in late 2008. As 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 gains of 46.8% and 85.1% for ExxonMobil and Chevron, respectively.
"We came to the conclusion that [the split] was the best way to create value to our shareholders," Mr. Mulva said Thursday in a conference call with investors. He has said he plans on retiring next year.
Some analysts speculated that a split was in the works after Mr. Mulva said in March that a spinoff was under consideration. Deutsche Bank analyst Paul Sankey said in an note to clients then that Mr. 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 Mr. Mulva.
The separation, which doesn't require shareholder vote, needs approval from the Internal Revenue Service, among other regulatory bodies. It's scheduled to be completed in the first half of 2012.
Plans to sell assets, including less-competitive refining operations, will continue amid the split, the Houston-based company said. Conoco also will continue with an about $11 billion share repurchase program this year and continue paying its dividend at the same level, Mr. Mulva said.
Supermajors such as ExxonMobil Corp., Chevron Corp. and Conoco were born decades ago as companies that produce oil, convert it into fuels and sell to customers. While gasoline demand was growing at a fast pace, the integrated model appealed to investors. In the last three years, however, the refining business became much less profitable than producing oil due to soft demand and excess capacity, said Fadel Gheit, an energy analyst with Oppenheimer & Co.
Conoco's breakup, which will be completed in the first half of next year, would make its refining operations the largest independent refiner in the U.S. With a capacity of 2.4 million barrels of oil a day[it’s about 2.0M bbl/d on an equity basis], it would surpass Valero Corp. The split will also create the largest U.S. independent oil-and-gas producer with daily output of close to two million barrels of oil a day[i.e. boe/d including NG output], about three times bigger than Occidental Petroleum Corp.
Some analysts consider ConocoPhillips's breakup plan a step toward the end of the integrated business model for the supermajors. 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 refining profits grow. Chevron and ExxonMobil 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," Oppenheimer's Mr. Gheit said.
Mr. Mulva said factors that made the integrated model valuable in the past have changed. "In the past, the view was that being integrated will lead you to have access to better investment opportunities. We think that has changed," he said.
The split will give shareholders the opportunity to choose for themselves whether they want to invest in the refining business or not, he said.
"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," Mr. Mulva said. Having two companies will also help management to focus on specific areas, he added.‹
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