Bloomberg News

ConocoPhillips to Spin Off Refining, Focus on Oil

July 14, 2011

(Corrects rise in Marathon Oil’s market value and timing of spinoff announcement in third paragraph.)

July 14 (Bloomberg) -- ConocoPhillips, the third-largest U.S. energy company, plans to shed its refining business through a spinoff to free capital for oil exploration and increase returns for investors.

ConocoPhillips will divide into two separate, publicly traded companies by the end of June 2012, the Houston-based company said in a statement today. Chief Executive Officer Jim Mulva, who has led the company since its creation nine years ago in a $25 billion merger, plans to retire once the spinoff is complete.

Oil producers such as Chevron Corp. and Marathon Oil Corp. have been trimming refining holdings to focus capital on more lucrative ventures such as offshore oil exploration and North American natural-gas drilling. Through yesterday’s closing price, Marathon’s spinoff of its refinery network, completed June 30, has yielded shareholders a 110 percent bonanza since it was announced in January.

“I love it!” said Fadel Gheit, a New York-based analyst for Oppenheimer & Co., who rates the shares “outperform” and owns none. “It worked for Marathon and it will work even better for ConocoPhillips. ConocoPhillips is a much better company.”

ConocoPhillips rose $1.21, or 1.63 percent, to $75.61 at 4:15 a.m. in New York Stock Exchange composite trading. The shares earlier climbed as much as 7.7 percent, the biggest intraday gain since May, 8, 2009.

Before today, the shares had risen 9.3 percent this year, lagging the gains of its larger U.S. rivals, Exxon Mobil Corp. and Chevron Corp., which rose 13 percent and 15 percent, respectively.

ConocoPhillips’s oil company will maintain its 66-cent quarterly dividend, Mulva said today on a conference call with analysts. The refining business also will pay a dividend and will have positive cash flow immediately, he said.

Largest Independent Refiner

The spinoff will be done in the form of a special dividend to shareholders, Mulva said during the call. All of the company’s existing corporate bonds will remain with the oil business, Mulva said on the conference call today.

Following the split, the refining arm will be the largest U.S. independent refiner, with over 2 million barrels of daily processing capacity. The capacity includes two plants held jointly with Canadian oil sands producer Cenovus Energy Inc., which Mulva says may be grouped with the refining unit. Valero Energy Corp. will be No. 2, according to data compiled by Bloomberg. Independent refiners don’t also own oil wells.

ConocoPhillips controls about 10 percent of U.S. processing capacity and also owns five plants outside the country, according to data compiled by Bloomberg.

‘Monkeying’ with Paper

“Their refining assets are certainly more geographically diversified than Marathon’s,” said Ann Kohler, an analyst at CRT Capital Group LLC in Stamford, Connecticut, speaking in a telephone interview. “Marathon benefits from its high integration in the mid-continent.”

ConocoPhillips may not benefit from its split as much as Marathon has, said Mark Gilman, an New York-based analyst for Benchmark Co. Marathon’s shares were severely discounted prior to its announcement, which isn’t the case for ConocoPhillips, said Gilman, who rates the stock “sell” and owns none.

“I don’t think they’re a strongly positioned company,” Gilman said. “Doing this doesn’t change anything. It’s monkeying with pieces of paper.”

The announcement comes as the crack spread, a measure of the difference between the cost of crude oil and the selling price of fuels derived from it, exceeds $35 a barrel, the widest in at least 25 years, according to data compiled by Bloomberg.

Mulva, 65, was CEO of Phillips Petroleum Co. in the late 1990s when he embarked on an expansion program that included acquisition in Alaskan oil fields, U.S. Midwest refineries and North American natural-gas wells.

Since the August 2002 merger that Mulva orchestrated to create ConocoPhillips, the company’s shares rose 189 percent, compared with increases of 133 percent and 173 percent for Exxon and Chevron, respectively.

--With assistance from Edward Klump in Houston. Editors: Jessica Resnick-Ault, Steven Frank

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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