Analyst: ConocoPhillips Split Is a Strong Move

July 15, 2011
Don't be surprised if other oil giants follow suit.

ConocoPhillips' decision to split into two publicly traded energy companies will make the Houston-based oil giant more competitive, an energy analyst tells IndustryWeek.

ConocoPhillips yesterday said it will turn its refining and marketing business and exploration and production business into two standalone corporations "via a tax-free spin of the refining and marketing business to ConocoPhillips shareholders."

The move, if approved by regulators, will help the company focus "on the more profitable exploration activities that are happening off the coast of the United States and in other countries" such as China and Russia, says Justin Molavi, energy analyst for IBISWorld.

"Exploration revenues are much more profitable given high emerging-economy demand and the ability to hone in on different market segments," Molavi says.

The decision to separate follows "a broad trend of U.S.-based oil and gas companies in response to waning [domestic] demand for gasoline," Molavi adds.

Other energy companies that have separated their refining and exploration businesses include natural gas producer El Paso Corp. and Marathon. The latter split its operations into Marathon Oil Corp., a Houston-based exploration company, and Marathon Petroleum Corp., a Findlay, Ohio-based refining business.

However, ConocoPhillips is the largest energy company to date that has decided to split. The company, which has $226 billion of annualized revenues, is No. 2 in market share in the United States behind Chevron, according to IBISWorld.

Molavi adds that he "wouldn't be surprised if another big player follows their lead."

It's All About the Emerging Markets

The move positions ConocoPhillips to expand its presence in emerging markets "that are demanding oil at accelerating rates," Molavi says.

"You want to have an exploration rig near China, near India, near the Middle East, because you can have refining assets there too, combine those two things and send your product out to market more quickly than the competition," Molavi asserts.

As for the company's statement that its new refining and marketing unit "will be a leading pure-play independent refiner with a competitive and diverse set of assets," you can file that in the corporate spin category.

"It's more like, 'Well exploration is more profitable and let's concentrate on that segment,'" Molavi says. "'And the [refining and marketing business] -- refining is better than gasoline wholesaling but it's no comparison to exploration revenue.'"

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