The proposed spinoff of the refining segment of ConocoPhillips
Last July, Marathon Oil
Better margins, higher returns
In 2011, while more than three-quarters of Conoco's revenue was derived from refining and marketing, the segment accounted for only about 30% of after-tax net profits. That's not really surprising, since refining businesses have lower margins compared to their upstream counterparts. I expect the spinoff to allow for better margins and potentially higher returns for shareholders. For Conoco, return on equity for the last 12 months was 18.5% while the corresponding values for ExxonMobil
The future looks exciting
In the exploration and production segment, the company holds around 8.4 billion barrels of oil equivalent in proved reserves. Conoco has a high reserve replacement ratio of 112%, which means it has added more reserves than it produced. The company is streamlining its portfolio with plans to sell non-core assets over the next two years. As a pure-play diversified E&P company, Conoco's U.S. and Canadian reserves remain the most exciting prospects and should witness strong growth.
The shale plays of Bakken, Eagle Ford, and Permian, along with the Canadian oil sands of Athabasca, should witness substantial production growth. The Greater Prudhoe area in Alaska is another exciting prospect. Conoco is also in talks with Exxon and BP over a $40 billion project to transport natural gas from Alaska to Asia.
Foolish bottom line
Asset-wise, the E&P segment accounts for around two-thirds of the total value. As a result, shareholders will receive one share of Phillips 66 -- the new refining arm, post-separation -- for every two shares of ConocoPhillips stock held. Watch this space for more on Philips 66.
For now, things look exciting for the upstream segment. As a special mention, I think Conoco should gain immensely from the spin-off. Keep abreast of the situation by adding Conoco to your free personalized watchlist.
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Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of ExxonMobil and Chevron. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.