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 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
So what energy spinoffs are coming up now?
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.
- Add ConocoPhillips to My Watchlist.
2. Post Brands
Bear with me. While it's not an energy company in the traditional sense, Ralcorp
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
- Add Ralcorp to My Watchlist.
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.
- Add DryShips to My Watchlist.
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.