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ConocoPhillips: The Making Of An Oil Major


If you asked Central Casting for an oil company CEO, you would not get James J. Mulva. He's a mild-mannered, soft-spoken number cruncher who started his career in the Phillips Petroleum Co. treasury office. In an industry filled with hard-nosed petroleum engineers, Mulva comes across as way too low-key to be the boss of ConocoPhillips (), the No. 3 American major, behind Exxon Mobil () and Chevron ().

But his actions paint a portrait that's more Mr. T than Mr. Rogers. As chief executive officer of the sleepy Bartlesville (Okla.)-based Phillips, Mulva conceived the bold $16 billion deal that created ConocoPhillips in 2002 and vaulted it into the league of energy giants so large they're called supermajors. Now he's shaping up as an aggressive risk-taker willing to place multibillion-dollar bets in the most volatile places on earth. All of the industry's big players are swimming in cash, but Mulva is plowing some 70% of the company's expected cash flow back into the business, compared with 60% at Chevron Corp. and 35% at Exxon Mobil Corp.. "We're aggressive about where we want to be five years from now," Mulva said to analysts on Nov. 16.

EMBRACING RISK

Mulva's ascent into the supermajor stratosphere was underscored by his appearance -- along with execs from ExxonMobil, Chevron, BP (), and Shell () -- before the Senate to defend "windfall profits" and "price-gouging" on Nov. 9. But ConocoPhillips, foremost among the majors, is behaving much as Big Oil's critics would have it behave. That's in stark contrast to ExxonMobil, for one, which has pleased the Street by paying down its debt practically to zero and unapologetically refusing to dramatically ramp up its reinvestment rate.

The risk-embracing strategy has earned Houston-based ConocoPhillips a lower price-earnings ratio than its rivals. Still, Mulva vows to boost production 3% annually. To that end, he's jacking up the company's share of Russian energy producer Lukoil () to 20% (from 15% now), pushing ahead on drilling projects from Alaska and Australia to Venezuela and Vietnam, preparing to splurge on liquefied natural gas projects, and even spending big to expand investment-starved U.S. refineries. Next year, Mulva will hike ConocoPhillips' capital budget to $11.1 billion, up 16% from 2004. His spree will look brilliant if supplies stay tight -- but misguided if prices drop to 1990s levels. Mulva declined to comment for this article. (Harold McGraw III, chairman and chief executive of The McGraw-Hill Companies (), BusinessWeek's parent, is a ConocoPhillips director.)

A banker's son, Mulva was born far from the oil patch, in Green Bay, Wis., in 1946. He and his brother, Patrick T. Mulva -- who happens to be corporate vice-president and controller of ExxonMobil -- both earned MBAs at the University of Texas at Austin. Jim Mulva became fascinated with the oil business while stationed in Bahrain as a U.S. Navy officer, but his first brush with it came earlier: His high school job was fueling planes at a Green Bay area airport.

He has a much more privileged view of the energy industry now. But at ConocoPhillips, Mulva faces a daunting business challenge, with expenses and political risks rising. The cost of finding and developing a barrel of oil has more than doubled in the past few years. At the same time, the company is also hoping to return to troubled countries such as Libya and Iraq as soon as possible. And its investment in Lukoil, which will hit $9.5 billion by the end of next year, exposes ConocoPhillips to the risks of abrupt change in leadership post-Vladimir V. Putin. Further, Russian state taxes and fees run close to 90% on oil revenue above $25 per barrel.

DEFT MOVES?

Of course, accepting huge risks means the chance of enormously lucrative rewards. On top of its equity ownership, ConocoPhillips is a joint-venture partner with Lukoil, drilling two potentially major new fields in Northern Russia. The alliance with Lukoil, a sizable player in Iraq before the war, may also help the partners win a major piece of Iraq's energy business -- if and when security and politics are stabilized. "Together they could get 35% of one of the largest undeveloped fields in the world," says Oppenheimer & Co. () energy analyst Fadel Gheit. "If they do -- and it's admittedly not likely anytime soon -- the payday for Lukoil and ConocoPhillips will be beyond anybody's imagination."

Mulva hasn't been right all the time. He'll spend $4 billion over the next five years to add capacity to ConocoPhillips' refining operation -- already the second-biggest in the U.S. But analyst Gheit notes that with refinery margins benefiting from tight capacity and robust demand, it will probably cost five or six times as much to add capacity as it would have five or 10 years ago, back when No. 1 refiner Valero Energy Corp. () moved aggressively to expand.

Even with the benefit of hindsight, Mulva has done a lot right. His aptly timed Conoco acquisition put the company in a position to benefit from a new global dynamic of rising energy demand that could last into the next decade. And his bold plans may ultimately prove that he adjusted more wisely and quickly to the changing world of energy than the other majors. Right or wrong, no one will accuse Mulva of being shy.

By Mark Morrison, with Jason Bush in Moscow


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