Spinoff Watch: Eyes Turn to Exxon, Chevron and BP

NEW YORK -- It starts with two. First, Marathon Oil Corp. made headlines earlier this year when it decided to spin off its downstream business (a move that became final on June 30). Then this Thursday, ConocoPhillips drew attention for its decision to split into two separate publicly traded companies. Now, analysts are turning their focus to other oil giants to see if they will follow suit.

Topping everyone's watch list are Exxon Mobil Corp., Chevron Corp. and BP Plc. According to a report on MarketWatch, analysts are looking toward Exxon and Chevron because, like ConocoPhillips, the two saw tremendous growth through acquisitions in the 1990s. However, ConocoPhillips now believes that model is no longer the best avenue to deliver extra value to its shareholders.

Fred Labatt, director of equity research for South Texas Money Management Ltd., said spinning off the refining units made sense for Marathon and ConocoPhillips. But that doesn't necessarily translate with Exxon and Chevron. He explained that the oil production businesses of the two companies do not offer the same type of growth rate as a company that focuses only on production, the news outlet reported.

"I don't know if you'd get a huge markup for Exxon and Chevron the way Marathon and ConocoPhillips did," Labatt said. "The large integrateds don't have the production growth to justify stand-alone valuations."

Conversely, Mike Breard, an energy analyst for Hodges Capital Management, told MarketWatch that "it would make sense" for Exxon and Chevron to spinoff their refining business because of conflicts between the business types. "Refiners buy oil to make into gasoline and they want oil to be as cheap as possible, but oil exploration and production companies want oil to be as expensive as possible," he said.

For its part, Chevron said it has no immediate plans to follow Marathon and ConocoPhillips’ lead. Spokesman Lloyd Avram told the news outlet that the San Ramon, Calif.-based company "is committed" to its integrated business model.

Still, Breard said Exxon and Chevron may take a wait-and-see approach, watching to see how Marathon and ConocoPhillips fare down the road.

BP has not escaped from under the watchful eyes of industry analysts either. According to a Bloomberg report out this morning, BP is under pressure to follow Marathon and ConocoPhillips in spinning off its refining business. Shares of the business have continued to struggle to make a comeback after April 2010's Gulf of Mexico disaster.

"We first proposed that BP pursue an upstream-downstream split back in 2006," Fred Lucas, an analyst at JPMorgan Cazenove wrote in an e-mail to Bloomberg. "The pressure, both peer-group and shareholder-related, to revisit this idea might have just increased several atmospheres."

Jon Rigby, an analyst with UBS, agreed. "If any company were to mirror this transaction, it might be BP," he said. "BP has traditionally been strategically bold and it's on a large net asset value discount. The exploration and production, and refining and marketing businesses would be very material companies in their own right and have critical mass, know-how and brand."

However, like Chevron, a BP spokesman told the news outlet that the company has no plans to spin off its refining business.