Conoco Phillips Announces Break Up

Conoco Phillips to Split Its Refining Business

ConocoPhillips ($78.65, +$4.25, +5.71%) disclosed plans to separate its refining and production businesses into two standalone, publicly traded corporations, becoming the largest energy company to date to reveal such intentions. Shares rose 9.5% to $81.50 in pre-market trading.

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.  Its CEO and Chairman, Jim Mulva, said Thursday that it will split itself into two separate publicly traded companies and plans to retire once the transaction is complete.  Its shares jumped $3.60, or 4.8 percent, to $78 in premarket trading.

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. Marathon’s spinoff of its entire refinery network, completed June 30, has yielded shareholders a 69 percent bonanza since it was announced seven months ago.

“We have concluded that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies,” Mulva said in a statement.

Conoco’s announcement comes on the heels of the breakup of Marathon Oil first announced in January. On July 1, Marathon Petroleum Corp., the refining company, began trading on the New York Stock Exchange under the “MPC” ticker symbol. Marathon Oil Corp. kept its ticker symbol of “MRO.”

“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 $3.48, or 4.9 percent, to $77.88 at 11:10 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.

ConocoPhillips CEO Jim Mulva

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.  Conoco said its board has approved separating its refining and marketing and exploration and production businesses by spinning off the refining and marketing segment to shareholders in a tax-free transaction.

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.

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.

“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.”

The split, which is expected to be completed during the first half of next year, will leave Conoco as an exploration and production company.  Mulva will lead the separation efforts, but plans to retire once the split is complete.  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.

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.

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