ConocoPhillips Seeks Identity With Planned Spinoff

(Corrects rise in Marathon Oil’s market value in sixth paragraph of story originally published July 14.)

ConocoPhillips (COP) will conclude a three-year restructuring program by shedding its fuel-making business next year to refocus the company on more profitable oil and natural-gas production.

The company will become two separate, publicly traded entities by the end of next June, Houston-based ConocoPhillips said today in a statement. Chief Executive Officer Jim Mulva, who engineered the creation of ConocoPhillips through a $25 billion merger in 2002, will retire once the spinoff is finished.

The decision to split the company is the culmination of a $17 billion asset sale program Conoco began in 2009 and expanded earlier this year. The company also has backed out of planned refinery projects and sold its 20 percent in Russia’s OAO Lukoil.

“Conoco’s been one of those companies that’s been stuck with respect to a business plan,” said Ted Harper, who helps oversee about $6.8 billion in assets at Frost Investment Advisors in Houston, including about 116,000 ConocoPhillips shares. “They’re kind of grappling for an identity.” The spinoff is a “first step” in deciding what kind of company it wants to be, Harper said.

ConocoPhillips rose $1.21, or 1.63 percent, to $75.61 at 4:15 p.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.

Shrinking Refining

Oil and gas producers such as Chevron Corp. and Marathon Oil Corp. (MRO) have been trimming refining holdings as they shift more spending to the global search for more hydrocarbons. Through the July 13 closing price, Marathon’s spinoff of its refinery network, completed June 30, has yielded shareholders a 28 percent bonanza since it was announced in January.

After the split, ConocoPhillips will become the largest U.S. independent oil and gas producer, a category defined as companies without refining, chemical or retail fuel businesses. The company expects output equivalent to about 1.7 million barrels of oil a day in 2011 before any additional asset sales, Mulva said in a conference call today.

The company’s production is more than double that reported by other big independent producers in the first quarter.

Apache Corp., currently the largest U.S. independent, had output of about 732,000 barrels of oil equivalent a day in the first quarter. ConocoPhillips said it expects additional production of 800,000 barrels of oil equivalent a day by 2015.

Buybacks, Dividends Continue

The company hasn’t hashed out all the details of the split, including the future location of its chemical venture with Chevron Corp., or its midstream venture with Spectra Energy Corp, Mulva said today.

The new exploration and production company will maintain its 66-cent quarterly dividend, Mulva said today. The spinoff will occur in the form of a special dividend to shareholders. All of the company’s existing corporate bonds will remain with the oil business, he said.

Most of ConocoPhillips’s $11 billion in planned share repurchases will occur this year, before the split, Mulva said.

Fadel Gheit, a New York-based analyst for Oppenheimer & Co., who rates the shares “outperform,” approved of the spin off plan. “It worked for Marathon and it will work even better for ConocoPhillips. ConocoPhillips is a much better company.”

Largest U.S. Independent

Following the split, ConocoPhillips’ fuel business will be the largest U.S. independent refiner, with more than 2 million barrels of daily processing capacity. The capacity includes two plants held jointly with Canadian oil-sands producer Cenovus Energy Inc., though no decision has been made yet on where to put that venture. Valero Energy Corp. will be No. 2, according to data compiled by Bloomberg. Independent refiners don’t own oil wells.

ConocoPhillips controls about 10 percent of U.S. processing capacity and also owns five plants outside the country, according to data compiled by Bloomberg.

ConocoPhillips may not benefit from its split as much as Marathon has, said Mark Gilman, a 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.”

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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