Conoco spins off refining arm

ConocoPhillips will spin off its refining arm in a bid to improve investment returns for shareholders, abandoning the bigger-is-better strategy that drove oil giants into mergers. As an integrated oil major with exploration and production, as well as refining and marketing, Conoco-Phillips ranked sixth globally and was often overshadowed by larger rivals such as ExxonMobil, Royal Dutch Shell and Chevron. By splitting the $107 billion (Dh392.97 billion) Conoco into two, each unit becomes the No 1 pure play in their segments, a move the company hopes will attract new investors and boost market valuations. Shares of Conoco initially jumped 7.5 per cent on the news, but those gains faded and the stock closed up only 1.6 per cent at $75.61 per share on Thursday. Article continues below Some analysts welcomed the move and said it would unlock value in the exploration and production unit, which accounted for 80 per cent of profit last year. But others said nothing fundamentally had changed in the business. "I'm not a fan of these fin-ancial engineering manoeuvres," The Benchmark analyst Mark Gilman said. "I don't see any incremental value associated with two separate companies." Conoco is the latest and biggest integrated oil company to break up, following Marathon Oil's split, which was finalised on July 1. Other energy companies, such as Williams and El Paso, have sought to split off operations to narrow their focus. Conoco is the smallest of the oil majors that include ExxonMobil, Royal Dutch Shell, Chevron, BP and Total. Exxon and Chevron had strongly defended their integrated strategies in the past. By splitting up, Conoco's refining arm will become the top independent refiner in the US above Valero Energy. Similarly, its exploration and production business will become the biggest independent player in that market above Occidental Petroleum. "We believe more value is created in the formation of two very clear, stand-alone companies," said chief executive Jim Mulva, who will retire upon the completion of the split. Conoco did not name new heads of the separate businesses. Strong oil demand The decision to split comes as confidence rises that global oil prices will remain strong for years as rising demand from China, India and other emerging markets soak up supplies. Mulva "built this company in a different commodity price environment and different outlook", said Barrow, Hanley, Mewhinney and Strauss analyst and portfolio manager R. Lewis Ropp, "and now we have an opportunity to separate back and really get peer group multiples that are much higher than the integrated multiples investors are assigning to the company". The split should unlock value in the exploration and production business, which is very undervalued, said Ropp, who is a long-time owner of ConocoPhillips shares. Raymond James analyst Stacey Hudson estimates Conoco's two companies would have a combined value of $80 to $85 a share, or $113 billion to $120 billion. The refining business would probably be worth about a quarter of that, Hudson said, although ConocoPhillips' decision about where to place its pipelines and storage operation and chemical business could have an effect on the final value. Portfolio shift In the past two years, ConocoPhillips embarked on a massive portfolio shift to sell up to $17 billion in assets and reduce its debt, while buying back shares and raising its dividend. The plan to return cash to shareholders will continue at both companies. The exploration company will contemplate share repurchases in 2012, when the split is expected to be complete, while both companies will pay a dividend, Mulva said. Strategies at both companies will remain the same, the executive told analysts. ConocoPhillips' exploration business will continue to shed mature oil and gas properties while looking to increase production and reserves that deliver good returns. The company's refining arm will sell, shut or make joint ventures of refineries that are unable to process cheaper grades of crude oil, Mulva said. Shift from general industry strategy ConocoPhillips will be the first of the so-called super majors to shift away from a strategy that led the industry to consolidate into a handful of players with global reach in the oil and gas production and oil products businesses. The announcement marks an abrupt change in the company's views on a spin-off of its refining business. In March, Mulva, asked at an analysts' meeting if he would consider a split like Marathon, said: "I think for them, they've decided it seems to make sense and work for them. Whether that's something that we should do, I don't think so." Options including a spinoff for the refining business came into the picture last fall, he told analysts more recently.