Conoco Phillips Moves Forward On Separation

By Eric Fox | September 07, 2011 AAA

Conoco Phillips (NYSE:COP) has released further details on the company's plan to restructure into separate upstream and downstream companies. After the restructuring is complete, Conoco Phillips will be the largest public exploration and production company available for investors to play the energy boom.
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Restructuring
In July 2011, Conoco Phillips announced that the company would separate into two distinct publicly-traded energy companies, joining the recent industry trend toward simplification. The exploration and production assets would stay with Conoco Phillips, while the downstream assets of the company would be spun off in an undisclosed manner.

Marathon Oil (NYSE:MRO) recently completed a similar restructuring, and that company's downstream assets are now held by Marathon Petroleum Corporation (NYSE:MPC), a completely independent public company.

Conoco Phillips is conducting the separation through the payment of a special dividend to shareholders, with a ratio set of one share of the downstream company for every two shares held of Conoco Phillips.

The timing of the restructuring is subject to approval by the regulatory authorities and the board of directors of Conoco Phillips. No shareholder vote is required and the company expects the restructuring to be completed by the second quarter of 2012.

Exploration and Production
Conoco Phillips is retaining all of the company's international and domestic oil and gas properties in the restructuring. These properties were producing 1.7 million barrels of oil (BOE) equivalent per day at the end of 2010, and are expected to produce between 1.625 and 1.65 million at the end of 2011.

This level of production will make the company more than twice the size of some of the largest existing independent exploration and production companies. Apache Corporation (NYSE:APA) reported average production of 749,000 BOE per day in the second quarter of 2011.

Conoco Phillips will keep $18 billion in debt, $6 billion in cash and continue to pay a yearly dividend of $2.64 per share. The debt to capitalization ratio will be 26%, assuming equity of $50 billion at the company.

Conoco Phillips is targeting annual production growth between 3 and 4% from 2013 to 2015, along with a 13% return on capital employed. This ROCE is less than some of the company's competitors. Exxon Mobil (NYSE:XOM) reported an average ROCE of 21.7% in 2010.

Downstream
The downstream company will consist of the refining, chemical and midstream assets of Conoco Phillips. The company will own 16 refineries with capacity of 2.4 million barrels per day, along with extensive assets in the chemical, pipeline and natural gas processing businesses.

In 2010, the refining segment generated 59% of the total cash flow from operations of the downstream segment.

Newco will assume $8 billion in debt, along with $2 billion in cash. The debt-to-capitalization ratio will be 29%, using the equity of $20 billion at the new company. The company plans to pay a yearly dividend of 80 cents per share.

The Bottom Line
Conoco Phillips is the largest energy company to announce a separation restructuring, reversing years of building a large integrated oil company. Time will solve the mystery of whether this is the correct long-term strategy or if this was driven by pressure from investors trying to pump up the stock in the short term. (For additional reading, take a look at A Guide To Investing In Oil Markets.)

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