Spinning off refinery operations can be a great opportunity. It allows management to focus all of of their attention on finding and developing new fields, but it also exposes companies to more volatility. Smaller firms can prosper by focusing their resources on bringing a select number of plays online, but watch out for falling production from bigger firms.
The big dog
ConocoPhillips (COP +1.37%) spun off Philips 66, becoming the largest independent E&P. In the long run, its size may hold the company back. Its latest quarterly operating income of $14.78 per Boe is respectable for such a large firm, but it is being forced into expensive unconventional plays. The company's own rough estimates project that its base production will fall from 1.5 million barrels of oil equivalent per day (Mmboepd) to 1.0 Mmboepd by 2017.
The majority of its growth will be found in North America. Between Alaska, Canada and the lower 48, it hopes to bring 505 thousand barrels of oil equivalent per day (Mboepd) online between 2012 and 2017. ConocoPhillips has jumped on the fracking train. The Eagle Ford, Permian Basin and the Bakken will provide a substantial portion of its growth over the next five years. Don't expect its Eagle Ford margins to be as high as other producers, as ConocoPhillips has some of its acreage closer to the gas-rich portion of the formation.
The smaller players
Marathon Oil (MRO +0.00%) recently spun off its downstream assets into Marathon Petroleum. Marathon Oil's development of the Bakken and Eagle Ford are the main changes boosting its production volumes. Year-over-year, its second quarter U.S. volumes increased 38%. The Eagle Ford alone averaged 80 Mboepd and the Bakken averaged 39 Mboepd.
Looking at Marathon's margins, it produced $9.35 of operating income per Boe in the most recent quarter, placing it a step below ConocoPhillips. Marathon is hard at work boosting its shale output of crude oil and NGLs relative to natural gas, but this a gradual process and its Boe margins will continue to be under pressure. Libya is a latent liability for the company. With a large amount of political risk in the nation, do not expect things to change anytime soon.
Murphy Oil (MUR +2.90%) has already spun off its US retail operations into Murphy Oil USA and is exploring the possibility of spinning off its U.K. refining operations. Divesting its refineries will help direct excess cash to developing new fields.
With 38% of its proven reserves between the Eagle Ford Shale and its Canadian Syncrude operation, Murphy has already accepted that unconventional plays are the way to grow. .
North American natural gas is a liability due to depressed market pricing, and Murphy has 29% of its proven reserves in natural gas. On the positive side, 8% of these reserves come from Malaysia where prices are tied to oil benchmarks and command a significantly higher price.
Looking at Murphy Oil's upstream operating income, it managed to produce $15.55 per Boe. Murphy Oil does not have Marathon's Libyan liabilities, and its recent quarterly production of 207 Mboepd makes it a small producer with a large amount of room to grow.
Conclusion
Out of the three companies mentioned here, Murphy Oil is a solid company to watch. It is relatively small, allowing for a few major fields like the Eagle Ford to have a substantial impact on its bottom line. It is still waiting to spin-off its U.K. refinery operations, and it is likely that more concrete plans will be announced as a future catalyst.
ConocoPhillips is doing well after creating Phillips 66, but the company is a large producer at 1,552 Mboepd. It will need to keep up its capital expenditures and exploration to maintain production over the coming decade. With 44% of its earnings going to its dividend, its cash flow may become constrained. Marathon has lower margins and a lower yield than ConocoPhillips, but its presence in the Bakken, Eagle Ford and conservative use of cash flow make Marathon a more stable dividend stock.
