For the Integrated Oils, Breaking up Is Hard to Do

A trend toward divorce continues to gain steam among U.S.-based integrated oil companies. No, I'm not referring to marriages falling apart, but to corporations that have been involved in exploration and production activities as well as in refining and marketing separating those two key functions. Arkansas-based Murphy Oil Corporation (NYSE: MUR  ) has announced that it will join Marathon Oil (NYSE: MRO  ) and ConocoPhillips (NYSE: COP  ) in cleaving its downstream activities into different companies.

There's little mystery behind the reasons companies are taking this course. Downstream activities typically result in lower margins than does the production of hydrocarbons, especially as crude and natural gas prices rise. And it's clear that the capital expenditures that are required to maintain complex refineries and even retail facilities can be put to more profitable use upstream.

Splitting the sheets
Murphy will form a new company, Murphy Oil U.S.A., the shares of which will be spun off to Murphy shareholders on an as yet undetermined date. The assets of the new company will include a chain of retail gas stations, seven product distribution terminals, and a pair of ethanol-production facilities, one in Texas and the other in North Dakota.

In a real sense, the announcement is simply an addendum to a program that was begun in 2010, when the company announced that it would sell its still-on-the-market refining and retail business in the U.K. Then in 2011, Murphy sold U.S. refineries in Wisconsin and Louisiana. The U.K. operations will remain with their current parent until a buyer is located.

Along with the announced spin-off, Murphy's directors also approved a $500 million, $2.50 per share, special dividend. It will be payable on approximately Dec. 3 to shareholders of record as of Nov. 16. In addition, the company is instituting a $1 billion share buyback plan.

The remaining Murphy Oil Corporation will concentrate on enhancing its existing exploration and production activities. At present, that involves programs in South Texas' fertile Eagle Ford Shale play, where it holds 220,000 acres, in a heavy-oil play in the northern part of Canada's Alberta Province, and in other international plays, including Malaysia.

A pair or precedents
ConocoPhllips, in addition to forming Phillips 66 (NYSE: PSX  ) with the assets from its downstream operations, has also sold off many of its upstream properties as well. In the process, the company has transitioned from being the third-largest of the U.S.-based integrated companies to a new status as the country's largest independent producer. Last year Marathon Oil Corp. stocked newly formed Marathon Petroleum (NYSE: MPC  ) with its downstream assets.

It's difficult to criticize the companies or to note any major loss of synergies when upstream and downstream operations are separated. Indeed, it seems to me from my observations of -- and participation in -- the energy industry that leaner, more focused companies will become far more efficient by limiting themselves to the progressively more challenging demands of producing oil and gas.

Punishing OPEC?
Several years ago, I wrote a master's thesis that examined ultimately unsuccessful efforts within the U.S. Senate to force separation of the biggest oil companies into their component parts. The approach was ostensibly directed toward punishing OPEC for causing an increase in worldwide crude prices beginning in 1973. While I was unable to ascertain a relationship between dismembering the integrated companies and penalizing the cartel, it just might have been that, had any of the Senate bills passed, the companies would ultimately have been benefited.

How about the big 'uns?
An obvious question arises regarding where ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) , the two biggest remaining U.S. integrateds, might wind up structurally. Both have unloaded overseas refineries of late, and each has faced difficulties with domestic facilities.

Chevron recently suffered a major fire at its Richmond, Calif., unit. And an unplanned outage at Exxon's Torrance, Calif., refinery is being blamed in some quarters for the rapid run-up in gasoline prices in the state.

In my rarely tentative opinion, those allegations fail to take into account the excessive number of gasoline blends that are peculiar to the Golden State. In addition, California refineries typically operate at unusually high capacity levels, such that even brief outages can affect retail gasoline prices directly. Beyond that, however, earlier this year more than 2,000 incensed Louisianans descended on their state's capitol steps to protest accidents at another ExxonMobil refinery, which totaled a whopping 109 incidents in 2010 alone.

Foolish takeaways
Nonetheless, I'd frankly be shocked if the two biggest U.S. integrated companies were to shed their refineries or retail facilities en masse. Rather, I expect them both to continue with "strategic disinvestment," or streamlining, i.e. selling off units that are marginal performers or are not strategically located.

I do, however, believe that Murphy will become far stronger, and its shareholders will benefit substantially from the company's planned actions. On that basis, I urge Fools to carefully monitor the company's progress on My Watchlist.

David Lee Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.


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