Inside the mind of Mulva

mulva20and20russians “I’m done wrestling with this bear”: James Mulva, Chief Executive Officer of ConocoPhillips, with Alexey Miller, Chairman of the Management Committee, Gazprom. (Gazprom photo).

Deutsche Bank senior analyst Paul Sankey put out an interesting report yesterday on ConocoPhillips called “Jim’s Psychology,” referring to CEO Jim Mulva. It’s a look at the transformation the Houston-based oil giant is going through, using a transformation of the CEO’s outlook as the lens.
First, a little perspective: ConocoPhillips became one of the supermajors almost overnight with their 2002 merger and continued an aggressive growth-through-acquisition mode for much of the rest of the decade.
Early this year COP led the charge in big cutbacks at the majors, however. At first it had the appearance of a cyclical move, as companies talked of trying to hold on to talent. But refiners felt the squeeze, the recession worsened, and now the outlook is for a fundamental change in the industry’s structure.
Deutsche Bank outlines how ConocoPhillips sees itself moving forward in this new world, clearly having had a long sit-down with Mulva.
First, the thesis: COP is Mulva’s baby. He was the head of Oklahoma-based Phillips when it merged with Houston’s Conoco in 2002.

“Mulva’s company, Phillips, has been shaped by the strategy and actions of him, as current CEO, more than any other major oil. Others have inherited the actions of their predecessors; he is in the saddle of his own horse. A pragmatic, focused, direct manager, he spoke of “a change in psychology” that has totally altered his worldview, and his vision for ConocoPhillips.”

The change in perspective that Mulva has had is from one of the “resource grab,” growing reserves by acquisition, to one of “shrink to grow,” of cutting back capital expenditures, selling off assets and focusing on shareholder returns.
That’s not to say Mulva didn’t do a good job of the “resource grab” strategy. Deutsche Bank says he was a master with a string of acquisitions that often defied the conventional wisdom of Wall Street. The list at the bottom of this post shows transactions Phillips did under Mulva, starting with ARCO Alaska in 1999, showing the energy prices the deal was based on and the actual prices. It wasn’t until the last two deals — EnCana’s heavy oil business and Origin’s Australian/Asian natural gas businesses — that the strategy started to look not-so-good.

“Both have served to convince the market – and Jim Mulva – that the aggressive growth strategy of the past decade went on for two years too long,” the report concludes.

Mulva’s outlook is now one many share, the report says, that there’s no point trying to compete with national oil companies like CNOOC, Sinopec or Gazprom, with their lower cost of capital and government backing to nationalize resources. This new psychology of Mulva’s will likely show up in the following priorities, Deutsche Bank says:

• ? Target share price performance.

• ? Sell around $10bn of assets within 2 years in order to reduce debt; determination on the part of Mulva to make this target is high. More assets may end up being sold and faster, starting with Syncrude in Canada at around $3bn of estimated value, a major step seems likely to be taken within months

• ? Neither Lukoil nor refining comprise part of the $10bn programme; maintain a strategic relationship with Lukoil but not necessarily the same level of equity participation. Sell refineries as soon as possible, but likely not in the next two years.

• ? Target higher return on capital employed – increase it by 2% under normalized oil and gas price assumptions of $75/bbl oil, $5/mcf natgas, and $5/bbl Gulf Coast crack

• ? Use cash on cash metrics

• ? Attack costs – there is no specifics on this, but controllable costs must be lower

• ? Growth is not a concern, but the company should not shrink volumes ex disposals

• ? Reserves should be replaced – organically

• ? 5%-10% growth in dividend as policy

• ? Debt not a major concern, but towards $20bn rather than $30bn currently

Where does Mulva fit into all this? Mulva is clearly signaling that “reports of his imminent mandatory retirement aged 65 in 2011 are false,” Deutsche Bank says. “First, there is no mandatory age. Second, he wishes to rationalise the company because he has had a “change in psychology”. Carrig will handle operations, but he will “see the job through” as CEO.

Mulva’s Phillips deals: 1999 to 2008:
Mulva Transactions