-- Robert Campbell is a Reuters market analyst. The views
expressed are his own. --
By Robert Campbell
NEW YORK, July 14 ConocoPhillips has hit on a
neat trick for dealing with its unwanted oil refineries at a
time when plenty of plants are on the block and there are few
buyers: it has decided to give them away.
Conoco (COP.N) announced on Thursday it would spin off its
downstream arm to shareholders by mid-2012, arguing that owning
refineries was no longer an advantage in gaining access to new
opportunities to explore for, and produce oil and gas.
Stock markets applauded the move, which comes less than
four months after the company's strategy meeting when it said
its downstream focus was solely on shedding less profitable
Clearly the outperformance of the shares of smaller rival
Marathon Oil (MRO.N) following its own decision to lop off its
refining arm focused Conoco managers' thoughts. (See Chart 1)
As recently as March, Conoco had talked of reducing its
worldwide refining capacity of 2.4 million bpd by 500,000 bpd.
A slide on page 82 of its strategy presentation (see link)
implied that seven of its 16 refineries were candidates for
divestment or closure.
So is this a trend? Is it the unwinding of the supermajor
movement from the late 1990s that saw the biggest oil companies
race to bulk up, arguing they needed massive scale to tackle
costly projects like deepwater and oil sands?
Is it also an admission that the Golden Age of refining,
which saw even the least efficient U.S. refineries become
hugely valuable as fuel demand soared before collapsing in
2008, is at an end?
It's hard to say, but there seems to be more at play here
than just responding to equity investors' demand for more "pure
play" companies. Refining may be struggling but in some places,
like the U.S. Midwest, it is again enormously profitable.
Chart 1: r.reuters.com/cup62s
Conoco's strategy: r.reuters.com/vep62s
Unlike Marathon, which had an enviable collection of
refineries concentrated in the U.S. Midwest, where cheap crude
and costly products produce bumper profits, most of Conoco's
assets are scattered outside that region and are under
First of all, a large number are the oil majors' cast-offs,
cannily purchased in the 1990s by Tom O'Malley, who gained fame
and fortune for his contrarian bets on refining, buying up
unwanted plants for a fraction of their cost as the majors
sought to bolster profitability.
O'Malley sold the plants to Phillips at a huge profit in
2001 as the (short-lived) Golden Age of refining began.
With neither scale nor niche advantages, they're not
exactly premium assets, unless you can buy them for very
For instance, ConocoPhillips has a big refining presence on
the U.S. East Coast, where margins are battered by high costs,
heavy competition and a reliance on costly, imported light,
It also has a jumble of European assets, some acquired as
part of the company's earlier effort to buy its way into the
supermajor ranks, including a small refinery in Ireland and
another at Wilhelmshaven in Germany that has all but been
permanently shut down.
Elsewhere, California's low-carbon fuel standard looks set
to heap pressure on Conoco's two refineries there by curbing
crude oil choices and cutting further into petroleum demand.
Oil demand in the rest of the United States is already
forecast to drop lower, so while plants in the Midwest, which
is structurally short of refined products, will be relatively
shielded, less efficient refineries on the Gulf Coast will be
fighting for their lives.
At the same time at least four refineries are up for sale
in the United States along with a slew of plants in Europe so
it is not exactly a sellers' market, as evidenced by the
reemergence of Mr O'Malley with his third refinery buyout
vehicle, PBF Energy.
So is this the end of the supermajor era or is it just
Conoco, which arguably never quite got to supermajor status,
throwing in the towel after a decade of costly
Certainly all the supermajors, even ExxonMobil, are
selectively cutting refining.
Shell, Chevron and Total have all closed or sold refineries
in Europe recently and BP is exiting much of its U.S. portfolio
after cutting back sharply in Europe.
But they all seem to see some value in retaining at least
their best performing refineries.
For Conoco, a company that has relied heavily on
acquisitions in its upstream business, it may be that the drag
of its refineries on its share price was perhaps getting too
heavy to sustain its model of buying up smaller players.
Rather than accept discounted prices and delay as it
negotiated the sale of individual plants the company has opted
for a swift amputation of its downstream arm.
(Editing by Alden Bentley)