Conoco Goes On A Diet

Jim Brown
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Some of the best news I have heard in year was the restructuring plans for Conoco. I have wanted to own them but the 20% stake in Russia's Lukoil was always a deal breaker. Russia has a habit of taking what it wants once they international company has nothing left to contribute.

Jim Mulva, the CEO of Conoco, powered the oil giant into an acquisition mode over the last ten years that others had difficulty matching. Nothing seemed too expensive or too difficult. It was grow at any cost.

Conoco racked up some serious debt along the way. Conoco merged with Phillips Petroleum in 2002. The combined company went into partnership with Lukoil in 2004 with Conoco taking a 20% stake. Conoco bought U.S. gas producer Burlington Resources in 2006 for $35 billion. It added a $8 billion LNG joint venture in Australia in 2008. It also owns a 9% stake in Canadian oil sands producer Syncrude and a 25% stake in the Colorado-to-Ohio Rickies Express Pipeline.

All of these acquisitions created a lot of debt and Conoco has choked on that debt over the last year when oil prices returned to the $30s and began its slow climb higher. Conoco's refining assets added to its pain in 2009 when low demand shrank crack spreads until they were negative in some cases.

Conoco appears to be throwing in the towel on its shopaholic ways and plans to accelerate its planned divestiture of non-core assets. Last fall Conoco said it was going to sell $10 billion in assets over the next two years and cut capital spending by 23% from 2008 levels. Now Conoco says it will raise $15 billion over the next two years. The funds will be used to buyback $5 billion in stock, increase its dividend +10% to 55-cents and pay down debt to a manageable ratio of 20% from its current 31% level.

The sales will decrease oil production by 100,000 bpd and shed 500 million barrels of proven reserves. Mulva said the smaller Conoco will focus more on producing oil and less on refining it. When crude prices rallied to $147 you would have thought refiners would be making a killing. It was just the opposite. High gasoline prices slowed demand and the crack spreads narrowed to losses in some cases. Then crude fell over $100 but again demand was so low that gasoline dropped al the way back to $1.25 per gallon and again refiners could not make money. All of the majors have seen the future and they don't like it. They are all shedding refining operations or closing them completely before getting caught in the next oil price rally with negative margins again.

The best part of this deal for me is cutting its stake in Lukoil. That has been a risky bet from day one. We have seen it time and time again where Russia trumps up a reason to eject partners from the deal once the profits start rolling in and the hard development work is done. We saw Shell kicked out of the $20 billion gas project. We continue to see BP on the verge of being ejected from the BP-TNK partnership. It is the same story over and over. If Conoco dumps half of its stake it will still own 10% of Lukoil and that is still a risk of $5-$7 billion but a lot more manageable. If they get dumped they will survive. I want to see them actually sell the first 10% before I pick up a few shares. If Russia knows they are leaving it could hasten the next divorce.

I am glad to see all the integrated oils dumping refining assets. It makes them a better play for the oil they own once the prices start heading into the triple digits again. They won't be able to dump them all but they will get rid of the ones with the highest cost and in the areas of lower demand. It is cherry picking time and they will be spitting out the pits.

Jim Brown

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