ConocoPhillips to split into two; shares rise

ConocoPhillips will split itself into two by spinning off its refining arm in hopes that each operation would be worth more as a separate company, it said on Thursday. Shares of ConocoPhillips, the third-largest US oil company, rose nearly 5 percent.
With the move, ConocoPhillips becomes the first of the so-called super majors to shift away from the strategy that led the industry to consolidate into a handful of players with global reach in the oil and gas production and oil products businesses. The move comes just two weeks after smaller peer Marathon Oil Co spun off its refining arm into Marathon Petroleum Corp, and analysts said it could help close a valuation gap with other energy companies. "We believe more value is created in the formation of two very clear stand-alone companies," Chief Executive Officer Jim Mulva told analysts on a conference call.
Two separate companies will allow their management teams to focus more intently on running their businesses, as well as allow investors a choice, Mulva said. Mulva "built this company in a different commodity price environment and different outlook," said Barrow, Hanley, Mewhinney & Strauss Inc analyst and portfolio manager R. Lewis Ropp, "and now we have an opportunity to separate back and really get peer group multiples that are much higher than the integrated multiples investors are assigning to the company."
The split should unlock value in the exploration and production business, which is very undervalued, said Ropp, who is a long-time owner of ConocoPhillips shares. Over the past two years, ConocoPhillips has embarked on a massive portfolio shift to sell up to $17 billion in assets and reduce its debt load, while aggressively buying back shares and increasing its dividend.
The plan to return cash to shareholders will continue at both companies. The exploration company will contemplate share repurchases in 2012, when the split is expected to be complete, while both companies will pay a dividend, Mulva said. Strategies at both companies will remain the same, the executive told analysts. But Benchmark Co analyst Mark Gilman said ConocoPhillips would lose flexibility in the allocation of capital. "I'm not a fan of these financial engineering manoeuvres," Gilman said. "I don't see any incremental value associated with two separate companies."
ConocoPhillips is the third-largest integrated US oil company, and the smallest of a peer group that includes Exxon Mobil, Royal Dutch Shell, Chevron, BP Plc and Total SA. Raymond James analyst Stacey Hudson estimates ConocoPhillips' two companies would have a combined value of $80 to $85 a share, or $113 billion to $120 billion.
The refining business would probably be worth around a quarter of that, Hudson said, although ConocoPhillips' decision about where to place its pipelines and storage operation and chemical business could have an effect on the final value. Conoco's 2002 purchase of rival Phillips was among the last of the megamergers that began in 1998 when BP bought Amoco. Houston-based ConocoPhillips said it expected to complete the separation in the first half of 2012.