As it's often said, breaking up is hard to do. That's especially true in the energy world, where integrated behemoths like ExxonMobil (XOM +0.36%) simultaneously operate several different businesses across the upstream, midstream, and downstream spectrum. This has pronounced benefits, including lower volatility of overall results, since one segment's suffering is commonly offset by another's strength.
At the same time, an oil major splitting up may unlock value for shareholders. That was the mentality behind ConocoPhillips (COP +1.88%) spinning off its refining and midstream businesses, and it's worked out very well. ExxonMobil's shares have underperformed both the overall market and many of its closest competitors this year, which begs the question: Would shareholders benefit from a break-up?
Are the parts worth more than the whole?
That's got to be the key question if ExxonMobil were to ponder a break-up. It's a consideration that merits discussion, especially considering the success ConocoPhillips had in its own spinoffs. You'll recall that ConocoPhillips spun off its refining unit, Phillips 66 (PSX +3.18%), last year. Phillips 66 even went a step further, spinning off its own midstream assets into master limited partnership Phillips 66 Partners (PSXP +0.00%).
The move by ConocoPhillips to make these businesses independently traded entities has indeed worked to shareholders' advantage. The spinoffs have unlocked considerable value, despite Phillips 66 seeing business deteriorate due to poor refining margins.
Consider that its refining business, the company's largest segment by far, saw earnings collapse by half through the first nine months of the year. This has more than offset growth in other areas, including its chemicals and specialties businesses. In all, Phillips 66 reported 15% lower earnings through the first three quarters. And yet, even while struggling so much this year, Phillips 66 shares sit at a 52-week high.
Phillips 66 Partners presents an interesting story, as it's a self-described 'growth-oriented' MLP. That means while Phillips 66 Partners yields just 2%, not nearly as much as many oil and gas MLPs, its focus is on growth. Phillips 66 Partners saw huge demand when it held its initial public offering earlier this year, meaning investors are obviously on board with its strategy.
Its units had an IPO price of $23 and quickly surged 30% to nearly $30 per unit on the first day of trading. As a result, there's precedent that indicates ExxonMobil's separate businesses may be worth more than the sum of the parts.
The risk of going it alone
Of course, the flip side of this argument deserves attention. The risk of underperformance of one or more of its individual segments is a very real concern. The integrated model ExxonMobil currently employs allows for inherently less volatility of its underlying results.
As previously mentioned, the poor environment for refining has severely affected most refiners, including Phillips 66. ExxonMobil's own refining unit is performing poorly as well, which is overshadowing relatively strong performance in other areas of its business. Consider that ExxonMobil's earnings fell 18% in the third quarter and are down 31% year to date, due almost entirely to its refining difficulties.
As a result, should ExxonMobil spin off its refining (or other) segments, investors in those particular units would be more vulnerable should business conditions worsen. However, investors may appreciate having the option to pick and choose which businesses they'd like to invest in. ConocoPhillips, Phillips 66, and Phillips 66 Partners each currently enjoy rising share prices while ExxonMobil has underperformed the market this year.
Should ExxonMobil follow a similar path as ConocoPhillips, it's true that each individual business would no longer enjoy the relative comfort of being under one big umbrella. On their own, specific businesses are clearly more susceptible to the troubles of their respective industries. That hasn't had a pronounced negative effect on ConocoPhillips, Phillips 66, or Phillips 66 Partners to this point. And that means ExxonMobil may have enough evidence to support a decision to break up.
