Lorrie
08-04-2008, 02:53 PM
Mon Aug 4, 2008 4:26pm EDT
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<TABLE style="FLOAT: left" cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD class=articlePhoto id=articlePhoto vAlign=center align=middle>https://www.reuters.com/resources/r/?m=02&d=20080804&t=2&i=5428739&w=192&r=2008-08-04T202557Z_01_N04470312_RTRUKOP_0_PICTURE0 (https://javascript<b></b>:launchArticleSlideshow();)</TD></TR></TBODY></TABLE><SCRIPT language=javascript>addImpression("1161612_Related News");</SCRIPT><SCRIPT type=text/javascript>removeImpression(); </SCRIPT>
By Matt Daily and Michael Erman
(Additional reporting by Anna Driver in Houston; Editing by Andre Grenon)
NEW YORK (Reuters) - Oil companies looking for a bump in their share prices are aiming for addition by subtraction: spinning off lower margin businesses such as refining to focus on red-hot exploration and production units.
And in an environment where proven oil and gas reserves are increasingly hard to come by, those split-off assets could pique the interest of some of the world's largest oil companies, who have plenty of cash, but little opportunity to pick up new oil and gas assets.
"Often times the greatest value enhancement from a spin-off comes from unlocking future strategic M&A opportunities that would not otherwise be available to a combined company," said Bruce Bilger, head of global energy at Lazard, who added there is no one size fits all answer for the sector.
Last week, Marathon Oil Corp announced it was considering splitting apart its oil and gas production business, including its Canadian oil sands output, from its refinery operations.
That followed EnCana Corp's announcement in May that it would separate its natural gas operations from its oil production and refinery joint venture with ConocoPhillips.
Oil companies could also look to spin-off pipeline and storage businesses or petrochemicals businesses as avenues to create value.
Among the companies analysts said would also make good candidates for business splits were ConocoPhillips and Hess Corp. ConocoPhillips declined to comment and Hess could not be immediately reached for comment.
HUNGRY FOR VALUE
Share values for exploration and production businesses have soared over the past few years along with energy prices, which are still well above historical levels even though crude prices have dropped significantly over the last month.
Also, a spin-off allows exploration and production companies to focus on spending to expand reserves. At integrated companies, expensive refinery projects can compete with production projects for capital.
"I would expect you would see more a likelihood of separation if you have an exposure to heavy oil on your balance sheet," said Tina Vital, equity analyst at Standard & Poor's.
Heavy oil, which is found in places such as Canada's oil sands, often requires huge spending programs to both produce and refine the fuel.
Analysts say Marathon's oil and gas arm is among the sector's more attractive exploration and production businesses, although the refining business makes the company more difficult to swallow. But as a separate entity, the oil and gas company could be a target for companies seeking to boost reserves.
"I do think it becomes much more attractive," said Lewis Ropp, who helps manage $60 billion at Barrow, Hanley, Mewhinney & Strauss.
Ropp said that because marathon owns a lot of stakes in oil fields operated by other companies, its E&P unit could "be folded in pretty easily into a number of other companies."
At a minimum, analysts said Marathon would see its valuation increase if it decides to proceed with a split. Its stock trades below valuations for either refining companies or pure-play E&P businesses.
Marathon's stock trades at just over six times is 2009 earnings compared with more than seven times for refiner Valero Energy Corp and 8 times for Tesoro. Most of the largest independent oil and gas producers are trading between about seven and 11 times 2009 earnings.
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<TABLE style="FLOAT: left" cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD class=articlePhoto id=articlePhoto vAlign=center align=middle>https://www.reuters.com/resources/r/?m=02&d=20080804&t=2&i=5428739&w=192&r=2008-08-04T202557Z_01_N04470312_RTRUKOP_0_PICTURE0 (https://javascript<b></b>:launchArticleSlideshow();)</TD></TR></TBODY></TABLE><SCRIPT language=javascript>addImpression("1161612_Related News");</SCRIPT><SCRIPT type=text/javascript>removeImpression(); </SCRIPT>
By Matt Daily and Michael Erman
(Additional reporting by Anna Driver in Houston; Editing by Andre Grenon)
NEW YORK (Reuters) - Oil companies looking for a bump in their share prices are aiming for addition by subtraction: spinning off lower margin businesses such as refining to focus on red-hot exploration and production units.
And in an environment where proven oil and gas reserves are increasingly hard to come by, those split-off assets could pique the interest of some of the world's largest oil companies, who have plenty of cash, but little opportunity to pick up new oil and gas assets.
"Often times the greatest value enhancement from a spin-off comes from unlocking future strategic M&A opportunities that would not otherwise be available to a combined company," said Bruce Bilger, head of global energy at Lazard, who added there is no one size fits all answer for the sector.
Last week, Marathon Oil Corp announced it was considering splitting apart its oil and gas production business, including its Canadian oil sands output, from its refinery operations.
That followed EnCana Corp's announcement in May that it would separate its natural gas operations from its oil production and refinery joint venture with ConocoPhillips.
Oil companies could also look to spin-off pipeline and storage businesses or petrochemicals businesses as avenues to create value.
Among the companies analysts said would also make good candidates for business splits were ConocoPhillips and Hess Corp. ConocoPhillips declined to comment and Hess could not be immediately reached for comment.
HUNGRY FOR VALUE
Share values for exploration and production businesses have soared over the past few years along with energy prices, which are still well above historical levels even though crude prices have dropped significantly over the last month.
Also, a spin-off allows exploration and production companies to focus on spending to expand reserves. At integrated companies, expensive refinery projects can compete with production projects for capital.
"I would expect you would see more a likelihood of separation if you have an exposure to heavy oil on your balance sheet," said Tina Vital, equity analyst at Standard & Poor's.
Heavy oil, which is found in places such as Canada's oil sands, often requires huge spending programs to both produce and refine the fuel.
Analysts say Marathon's oil and gas arm is among the sector's more attractive exploration and production businesses, although the refining business makes the company more difficult to swallow. But as a separate entity, the oil and gas company could be a target for companies seeking to boost reserves.
"I do think it becomes much more attractive," said Lewis Ropp, who helps manage $60 billion at Barrow, Hanley, Mewhinney & Strauss.
Ropp said that because marathon owns a lot of stakes in oil fields operated by other companies, its E&P unit could "be folded in pretty easily into a number of other companies."
At a minimum, analysts said Marathon would see its valuation increase if it decides to proceed with a split. Its stock trades below valuations for either refining companies or pure-play E&P businesses.
Marathon's stock trades at just over six times is 2009 earnings compared with more than seven times for refiner Valero Energy Corp and 8 times for Tesoro. Most of the largest independent oil and gas producers are trading between about seven and 11 times 2009 earnings.