NEW YORK -- Now that ConocoPhillips is spinning off its refining business, analysts are pondering whether the U.S.' other largest oil companies may similarly dismantle themselves, according to a MarketWatch report.
Exxon Mobil Corp. and Chevron Corp., the largest U.S. oil companies by market capitalization, bulked up through acquisitions in the 1990s, which marked the birth of the super-major oil company.
On Thursday, ConocoPhillips, the third-largest company, said that model no longer meets its goal of delivering extra value to its shareholders and charted a course [image-nocss] to become two stand-alone companies with clear, separate business lines.Click here to read CSP Daily News' coverage of the separation.
Earlier in July, Marathon Oil took a similar route by creating Marathon Petroleum Corp., a new, independent refining company.
Fred Labatt, director of equity research for South Texas Money Management Ltd., said the spinoff made a lot of sense for Marathon Oil because its exploration side was undervalued.
So, too, a ConocoPhillips without its refining unit could earn a loftier valuation based on its stakes in the liquids-rich Eagle Ford region of south Texas and other properties, he told MarketWatch.
But he pointed out that the oil-production business of ExxonMobil and Chevron doesn't offer the same kind of growth rate as a company that focuses only on production. Therefore, a stand-alone crude-oil-production unit wouldn't command a loftier price-to-earnings ratio for Exxon and Chevron.
"I don't know if you'd get a huge markup for Exxon and Chevron the way Marathon and ConocoPhillips did," Labatt said. "The large integrated [oil companies] don't have the production growth to justify stand-alone valuations."
Instead of spinning off their entire refining businesses, the oil majors are selling off some downstream units to lift valuations, he said.
For example, Chevron is selling its 270,000 barrel-per-day Pembroke refinery in Wales to Texas-based Valero Energy Corp. for $730 million, plus an estimated $1 billion for inventory and other items.
Mike Breard, an energy analyst for Hodges Capital Management, said it would make sense for Exxon and Chevron to split off their refining businesses because of conflicts between the business types.
"Refiners buy oil to make into gasoline, and they want oil to be as cheap as possible, but oil exploration and production companies want oil to be as expensive as possible," Breard told MarketWatch.
Overall, the gasoline-making business faces challenges from the wider use of biofuels, the potential of natural gas as transportation fuel and the rising popularity of cars that run on less gasoline, he said.
"I'd rather see a refining pro running a refining company and an oil pro running an oil company, Breard said. "I guess Exxon and Chevron will see how Marathon and ConocoPhillips shares perform after the spinoffs and then that will help them make up their minds."
Chevron spokesman Lloyd Avram said the San Ramon, Calif.-based company "is committed" to its integrated business model.
"We believe it is central to our value proposition and executing our long-term growth strategy," Avram wrote in an email to MarketWatch.
Meanwhile, BP Plc came under pressure from analysts to follow ConocoPhillips and spin off its refining business as the shares struggle to recover from last year's Gulf of Mexico spill, according to a Bloomberg report.
BP value has dropped 30% since the blowout at the Macondo well in April 2010 that triggered the worst U.S. spill in history.
That leaves BP trading at a 44% discount to the sum of the parts of its business, compared with an average discount of 27% for the world's biggest oil companies, according to Fred Lucas, an analyst at JPMorgan Cazenove. UBS AG and Bank of America-Merrill Lynch also argued that a refining spinoff would unlock value in London-based BP.
"We first proposed that BP pursue an upstream-downstream split back in 2006," Lucas wrote in an email to Bloomberg. "The pressure, both peer-group and shareholder-related, to revisit this idea might have just increased several atmospheres."
BP has no plans to spin off its refining business, company spokesman Robert Wine said Friday.
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