Wednesday, August 01, 2012

Stratagem-INTERNATIONAL : BIG OIL: SPLITTING-UP OPERATIONS

The world’s largest publicly-listed oil majors did achieve operational efficiencies by riding the M&A wave that began post the Asian Crisis. But times have changed and with their merged state being questioned today, some are mulling over a new strategy to split upstream and downstream operations. Is this a wise move? 

Then there is the pessimistic long-term forecast for US refining, with falling demand and rising foreign supply. Will this help efficiencies? Surely not. Political and geographical risks are issues too, and in this regard, its recent inorganic growth plan that increased its overseas reach does not help. This is also evident in its $4.5 billion impairment charge for expropriation of its Venezuelan assets. Also, COP’s joint-ownership of assets will not make the split easy, as Allen Good, Senior Analyst at Morningstar, while speaking to B&E from Chicago says, “The ownership of refining and chemical assets through joint ventures may complicate any planned spin-off.” In short, how effective and simple the COP split will be, only time will tell. For now though, it appears a rough ride ahead.

With dynamics of the oil and gas industry evolving everyday – with refining operations becoming less and less profitable, nations become more protective of their natural resources, partnerships with national oil companies and politically unstable countries which threaten production growth, increased geopolitical risks, increased production costs and lowered outlook for the US and European refining markets that limits future downstream profitability in the longer term – the integrated model remains the single, most-resilient form to stick to for both ExxonMobil and ConocoPhillips alike. And instead of announcing a split, the better model would be to divest gross NPAs, while reducing capacity in an integrated format. At the end of the day, even big oil CEOs owe it to their shareholders. Forget historical data, it’s the science of modern day stock markets which works – whether it be Tillerson (Exxon) or Mulva (COP), if the markets react negatively, it’s a wrong move. That is the basic rule for CEOs of public companies. Merge, acquire, split or sell-out – don’t lose sight of the ticker.


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