By Simone Sebastian and Emily Pickrell
Houston Chronicle staff writers
Global oil giant ConocoPhillips splits into two smaller energy companies Tuesday, abandoning the super-major model that its retiring leader helped engineer a decade ago.
After directing the 2002 merger of Conoco and Phillips Petroleum, CEO James Mulva’s final act was to disassemble it. He leaves behind a more modest oil exploration and production company, streamlined by the aggressive asset sell-off that has defined his final years at the helm.
Meanwhile, the refineries, chemicals and pipelines that helped make ConocoPhillips the nation’s third-largest oil corporation (behind Exxon Mobil and Chevron) have spun off into a new company, Phillips 66.
Both companies are headquartered in Houston.
Mulva is the last of a group of oil executives who orchestrated the model of building companies that delivered fuel from the ground to gas tanks through their own international networks of exploration, refining and distribution assets.
“He appreciated the changing paradigm in the industry a decade ago when all the oil companies were combining,” said Doug Terreson, head of energy research for ISI. “The oil industry is shifting toward a new competitive paradigm now and separation makes a great deal of logic.”
Mulva’s successor, Ryan Lance, is a petroleum engineer who oversaw the corporation’s exploration and production operations.
Greg Garland, who was the head of the ConocoPhillip’s Americas exploration and production unit, is now CEO of Phillips 66.
ConocoPhillips’ fossil-fuel production has declined over the past year, as the company liquidated more than $10 billion in assets. Under Mulva’s “shrink to grow” philosophy, it sold interest in Russian oil company Lukoil and shed natural gas-producing assets.
Still a top producer
Still, the new ConocoPhillips ranks as a top producer of North American fossil fuels among independent oil companies that draw oil and gas from the ground but don’t have refining or other downstream operations. Lance has promised to increase production by 3 percent to 5 percent annually over the next five years, even as the company closes wells in the low-priced U.S. natural gas market.
In another challenge, Lance has pledged to uphold ConocoPhillips’ legacy of delivering top dividends, funneling as much as 25 percent of operating cash flows to shareholders.
“We will combine the growth focus and culture of an independent, with the operations and functional excellence and returns of a major,” he recently told analysts.
However, cash from ConocoPhillips’ refining unit subsidized expansion of the exploration and production business and helped fund those shareholder payouts, said Robert Kessler, head of integrated oil research for Tudor, Pickering and Holt. “He has some formidable challenges ahead of him,” Kessler said of Lance. “I have high hopes for him.”
Challenge to Valero
Phillips 66 now challenges San Antonio-based Valero as the nation’s largest independent refiner, outranking Valero in assets but trailing in refining capacity. Phillips 66 has sold its Trainer refinery in Pennsylvania and is selling its Alliance refinery in Louisiana.
“This time last year, less than half of the industry was controlled by independents,” said Roger Ihne, a Mid-Americas portfolio leader with Deloitte & Touche. “By the end of this year, over 70 percent of the refinery capacity will be held by independent refineries.”
The ConocoPhillips split invites comparisons to Marathon Oil, which spun its refining business into Marathon Petroleum Corp. last year. But when Marathon spun off its refining division, the performance of the new company relied exclusively on the refineries; the best performing divisions for Phillips 66 are expected to be its midstream joint venture and a petrochemicals company.
One is DCP Midstream, a 50-50 joint venture with Spectra that helped counteract poor refining performance last quarter for ConocoPhillips.
Low natural gas prices have hurt DCP’s processing and marketing lines, but it also produces and transports higher-priced natural gas liquids and recently announced plans to build natural gas liquids pipelines that will connect the Bakken, Eagle Ford, Permian and other high-growth shale plays to the Gulf Coast.
“The fundamentals of the business could not look better,” said Spectra CEO Greg Ebel. “DCP operates in liquids-rich areas. In those areas, we are seeing dramatic volume growth, which is helping overcome low natural gas prices for our consumers.”
Chevron Phillips Chemical, a joint venture with Chevron that will be part of Phillips 66, is benefiting from low prices for the natural gas it uses as feedstock to make products such as ethylene and polyethylene plastic. The company has made it clear that Chevron Phillips Chemical is a top priority. It has announced plans to invest in a new $5 billion ethylene cracker at Cedar Bayou.
And Garland, who formerly headed Chevron Phillips Chemical, was selected to head the new company over Willy Chiang, senior vice president of ConocoPhillips’ refining division.
“The refining business is currently a difficult business and one where the outlook doesn’t change a lot going forward,” said Mark Gilman, an independent oil and gas analyst. “Phillips 66′s asset quality in the refining space is, at best, kind of average.”