ConocoPhillips split puts another dent in Big Oil model

ConocoPhillips’ announcement Thursday that it will split into separate refining and exploration-production companies heralds a new era for the Houston oil giant and offers another sign that the all-in-one business model oil majors have preferred for years may be falling out of favor.

ConocoPhillips, the nation’s third-largest oil company, is the latest to sharpen focus on oil and gas production by selling refineries or spinning off refining businesses altogether. And it may not be the last.

Major integrated oil companies like Chevron and Shell are under increasing pressure from investors to boost oil and gas output, like smaller rivals that do not have to maintain a stable of capital-intensive refineries.

Extreme volatility in the refining sector in recent years also has at times been a drag on the integrated giants’ earnings and spooked some investors.

The headwinds led oil majors to slash their refining capacity by nearly 10 percent in the last two and a half years, according to analysts at Raymond James, who in a report this week asked, “Is the integrated oil company model withering away?”

In late 2009, ConocoPhillips Chairman and CEO James Mulva openly doubted whether the bigger-is-better model still makes sense when large oil companies need to be financially agile as oil and natural gas become harder to find and more costly to extract.

He said then that the company would be “shrinking to grow” by selling more than $10 billion in assets — a target later increased to $12 billion to $17 billion – and reducing its oil refining capacity by as much as one third.

The idea for a wholesale spinoff of the refining business re-emerged last fall, after being considered several times in recent years, Mulva told analysts in a conference call Thursday.

Marathon split paid off

Analysts said the concept likely gained momentum after Houston’s Marathon Oil Corp. announced plans in January to spin off its refining unit, a move that helped boost its stock price 40 percent by the time of the actual split last month.

Mulva said in a statement Thursday the decision is “consistent with our strategy to create industry-leading shareholder value” and “that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies.”

Several analysts on Thursday agreed with the premise, but said challenges lie ahead.

“The split makes sense on the surface,” said analysts with Houston investment bank Tudor, Pickering, Holt & Co. But one key will be convincing Wall Street that a stand-alone ConocoPhillips oil and gas firm can compete with higher-growth peers.

Stock jumps $1.21

Two things that may help woo investors are the company’s focus on North America, where operational risk is low versus regions like the Middle East, and dividend payments that will likely be double those of its largest competitors, said Brian Youngberg, who follows the company for Edward Jones. And the newly created refining business should benefit from improved refining margins in 2012, he said.

ConocoPhillips’ stock price rose $1.21 to close at $75.61 in New York Stock Exchange trading.

ConocoPhillips has about 4,000 employees in the Houston area. Company officials said most will keep their jobs, but did not say whether the new company will be headquartered in Houston.

The company said the separation of the companies should be complete by the first half of 2012, after which CEO Mulva will retire, as previously announced.

International oil companies including Exxon Mobil Corp., Chevron and BP grew significantly in recent decades through acquisitions designed to expand their global reach, reduce costs and diversify their holdings.

ConocoPhillips, Houston’s largest public company, with $199 billion in revenue last year, is a good example. In 2002, Conoco and Phillips Co. merged in a $25 billion deal.

Four years later, the combined company paid $35.6 billion deal to buy Burlington Resources, a transaction that was later blamed for saddling the company with massive debts.

But the trend has reversed in recent years as the financial downturn and tough refining business spurred oil majors including Chevron, Shell and BP and smaller integrated oil companies like Murphy Oil to shed refining assets.

“It is a business model that unless you have the size and scale of Exxon Mobil, it’s probably not conducive right now to operate in,” said Youngberg, with Edward Jones.

‘The common thread’

Exxon Mobil, the nation’s largest oil company, has said repeatedly it sees continued value in the integrated business model, as have Shell and Chevron. But with every new announcement, speculation grows on whether others will follow suit.

“The common thread would be that we don’t see value in the integrated business model,” said Phil Weiss, analyst with Argus Research in New York. “And given that, I think it’s quite possible there are more of these.”

 

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