Profit From 3 Big Energy Spinoffs

Spinoffs are a great place to search for big winners. The energy industry has been home to a few this year, and more are in the works over the next few months. Read along and I'll explain why spinoffs are great opportunities, and give three you can take advantage of now.

Spinoffs
Spinoffs create value by simplifying company structures and enabling management to give each company its full attention. The simplified companies are also easier for investors to understand, which frequently leads to higher valuations.

In January, at a stock price of $40.53, Marathon Oil (NYSE: MRO  ) announced that it would split up its exploration and production, or E&P, business and its refining business. Shareholders received half a share of Marathon Petroleum (NYSE: MPC  ) for each share of Marathon Oil they owned. At Thursday's price of $31.99 for Marathon Oil and $40.10 for Marathon Petroleum, that's a return of nearly 30%. Returns like that keep intelligent investors on the lookout for spinoffs.

So what energy spinoffs are coming up now?

1. ConocoPhillips (NYSE: COP  )
ConocoPhillips is following Marathon's lead and splitting up its E&P and refining units. This continues the restructuring the company started in October 2009 to reshape its balance sheet by selling non-core assets, including its 20% stake in Russia's OAO Lukoil, its 9% stake in Syncrude Canada, and a 1,700 mile natural gas Rockies Express Pipeline, among others. By splitting up its businesses, ConocoPhillips will be the leading pure play E&P, and its spinoff will be one of the top refining companies in the U.S. The E&P business can continue to focus on increasing its per-share production and reserves, and the refining business can increase shareholder value by simplifying its asset portfolio and getting a renewed focus by management. The transaction is expected to be completed in the first half of 2012.

2. Post Brands
Bear with me. While it's not an energy company in the traditional sense, Ralcorp (NYSE: RAH  ) is spinning off Post Brands, maker of cereals like Honey Bunches of Oats that give you energy (ta-da!) to start off your day. I realize I'm stretching the definition of energy here, but there really is a lot to like about Post Brands, so please hear me out.

Ralcorp bought Post Brands from Kraft in 2007 for $1.65 billion. The business has been doing well and is remarkably strong. In the past 12 months, Post did $950 million in sales with profit margins of more than 20%.

This past spring, ConAgra (NYSE: CAG  ) made a bid for Ralcorp for $86 per share. To fend off ConAgra, Ralcorp is loading the Post Brands business with a bit more than $1 billion in debt, keeping the cash for itself, and spinning off Post. While that might not sound very palatable for Post Brands, that's the point. Hopefully, after the company is spun off, shareholders will sell it, creating a great buying opportunity for intelligent investors. The company's strength should help it easily pay down the debt over time. This is one stock for your watchlist if there ever were one.

3. DryShips (Nasdaq: DRYS  )
DryShips, as you may expect, runs dry bulk ships. However, in 2007, it added more debt to its balance sheet and acquired a Norwegian oil drilling rig business called Ocean Rig. It then spent a fortune expanding its drilling rig fleet. This decision is paying off now. The dry shipping business is down in the dumps, but the oil rig business is doing well. This combination of bad business, good business, and debt has some Fools calling Dryships the greatest gamble in stocks. It gets spicier: DryShips is planning on spinning off its Ocean Rig business in the next few months. The company sold a 22% stake to investors in December for $500 million, valuing the oil rig business at just under $2.5 billion. This will be an interesting situation to watch going forward; I'd hold off on buying shares until we know more about the exact timeline and structure of the spinoff.

Foolish bottom line
Spinoffs are a great place to find overlooked opportunities. Of the three above, I believe investors should pay most attention to Post Brands. If you're looking for an energy idea you can buy now, check out The Motley Fool's free report, "The Only Energy Stock You'll Ever Need." In it, Fool analysts detail a company to profit from the global energy boom. Click here to grab a copy.

Dan Dzombak holds no position in any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2011, at 5:57 PM, PeakOilBill wrote:

    Hoffmeister of Shell Oil was on TV today saying to expect $150 oil and $5 gasoline by the end of next year. IF that happens, you will make a KILLING in oil stocks. Just saying.

  • Report this Comment On July 22, 2011, at 6:23 PM, plange01 wrote:

    a recent spinoff of kmi turned out to be a failure from its first day and has only got worse as time goes on....

  • Report this Comment On July 22, 2011, at 6:28 PM, Gailen wrote:

    Isn't it a little late to profit from these once they have been announced? The 30% for Marathon includes the announcement effect. How much came after the spin-off was actually announce? ... and distributed? And how much is simply attributable to rising oil prices? It would be helpful to separate the effects with more careful measurement.

  • Report this Comment On July 25, 2011, at 2:38 PM, loat98 wrote:

    Seems like we need to know more than the "timeline and structure of the spinoff" in the case of Dry Ships. If George Economou is still the CEO, we better watch the hand picking our pocket. See also fool articles from the past:

    http://www.fool.com/investing/small-cap/2007/10/29/dryships-...

    http://www.fool.com/investing/small-cap/2010/08/09/are-you-a...

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