Did Conoco Start A Trend?

Todd Shriber
 
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One of the biggest headlines over the past week in the oil patch was the announcement by ConocoPhillips, the third-largest U.S. oil company, that it will split its marketing and refining business off into a separate publicly traded entity next year. The announcement came on the heels of much smaller Marathon Oil doing the same thing recently and as Bloomberg News reports, the move by Marathon has been an ''unqualified success'' as Marathon shares had jumped more than 25% heading into this week since it first made its spin-off announcement.

Not surprisingly, Conoco's (COP) announcement set off a flurry of speculation from the analyst community wondering if any of Conoco's rivals that are similar or larger in size would follow suit. It is a fair question to ask for the simple reason that the integrated oil business model is quixotic one. An exploration and production firm relishes high oil prices while refiners prefer lower prices. Combining those two businesses under one roof seems contradictory.

That said, it is still tough to speculate on who will follow in Conoco's footsteps, if anyone. Chevron (CVX), the second-largest U.S. oil company, said in the wake of the Conoco announcement that it remains committed to the integrated model. Exxon Mobil (XOM), the largest U.S. oil company, did not comment and some analysts doubt the two could unlock enough shareholder value to make downstream spin-offs worthwhile.

Occidental Petroleum (OXY) has not been mentioned in the spin-off fray, perhaps because any spin-off of Oxy's midstream assets would have to include the Phibro trading business that the company has not even owned for two full years. Last week, analysts at Bank of America Merrill Lynch, JPMorgan and UBS all made sound arguments for why BP should follow the lead of Marathon (MRO) and Conoco and spin-off its refining and marketing operations.

I have no way of knowing if BP (BP) will heed that advice, but my opinion is that it makes a lot of sense for Europe's second-largest oil company to at least consider it. The company has been parting with billions of dollars worth of assets, some of them pretty good, to raise cash for the Gulf of Mexico oil spill. A spin-off makes perfect sense as it raises cash, unlocks value for BP's beleaguered investors and gets rid of a business that has been a headache for BP. Remember Texas City? BP sure would like to forget that fatal incident.

As for Conoco, the move appears to be a shrewd one, at least in the opinions of myriad analysts and investors that chimed in on the subject. Looking to the future, the company will be the largest U.S. independent oil producer and unlike future independent rivals such as Apache (APA) and Anadarko, Conoco will pay a noteworthy dividend. The company has pledged to keep its 66-cent per share per quarter payout as an independent company. Currently, Apache and Anadarko (APC) COMBINE for 96 cents per share annually.

At the end of the day, it probably is not reasonable to expect BP or any other major integrated to jump because Conoco did, but in an era of high oil prices, there is something to be said for the independent model. There probably will be some Conoco copycats. They may just wait a while to get around to doing the imitating.

Todd Shriber

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