ConocoPhillips pulls a Marathon



Call it the Summer of Split. ConocoPhillips becomes the latest integrated oil company to decide it doesn’t want to be so integrated anymore. Houston’s largest company said it will split into to two smaller ones, severing its refining business from its exploration and production operations.

The decision follows a similar move by Marathon, which orchestrated a similar split last month.

As part of ConocoPhillips’ split is expected to be completed early next year, at which time Chairman Jim Mulva will retire.

ConocoPhillips is the second-largest U.S. refiner, and after the split it will become the biggest independent one, surpassing Valero in terms of capacity.

So what’s driving these divorces between exploration and refining? It’s what’s known in the industry as crack spreads, or the difference between the cost of crude oil and refined products like gasoline. The spread currently is more than $35 a barrel, the widest in 25 years, according to Bloomberg News.

In other words, both ConocoPhillips and Marathon believe the two halves of their businesses were working against each other from a pricing standpoint, resulting in a stock value that didn’t fully reflect what the companies were worth. Splitting them apart increases the value for each piece, making them worth more separately than as a combined business.

That strategy worked well for Marathon, and it may work even better for ConocoPhillips.

Loren Steffy

2 Responses

  1. Dollar says:

    But how long term is a $35 crack spread ?

    This is a very long term decision to be based on something, that appears to me anyway, to be very short term.

  2. ntangle says:

    Referring to crack spreads is a simplified way to look at refining margins. COP should be enjoying good margins at their Midwest refineries, so their downstream operations should look healthy. Unlike G.C. refineries, they benefit from access to cheaper Canadian crude and other crudes that are practically stranded North of Cushing. That spread may diminish after Keystone XL et al provide routes all the way to the G.C. And when there are new pipeline routes from Eagle Ford as well. Now might be the best time to create the downstream company, before their crude cost advantage diminishes.