Conoco asset divestiture seen a hard sell

HOUSTON (Reuters) - ConocoPhillips' (COP.N) efforts to raise $10 billion from asset sales may force the oil giant to part with some of its best jewels, since the refineries and older natural gas assets it is likely to put on the block will not bring the cash it needs to meet its debt targets.

ConocoPhillips has spent $80 billion on acquisitions in the last eight years that have done little to quell investor criticism of its growth prospects, while leaving the Houston-based company with $29 billion of long-term debt.

ConocoPhillips can either improve its existing asset base by divesting less attractive properties at sub-par prices or it can sell more desirable assets -- such as its stake in Russia's LUKOIL -- and hurt profit growth.

"What can they realistically sell?" said Mark Gilman, analyst at The Benchmark Co. "Too much of their portfolio is focused on segments of the business that are not likely to get terribly attractive results, like gas or refining."

The company has not publicly identified any assets it intends to sell, but indicated to Wall Street analysts at a meeting in New York this week it will likely put up for sale nonstrategic, mature assets, analysts said.

The sales may also include properties where the U.S. oil major has a small working interest, or non-controlling interest like the company's minority stake in Syncrude Canada Ltd, an oil sands mining venture, analysts said.

U.S. NATURAL GAS?

The global recession has hit demand for natural gas. As a result, U.S. inventories have built to record levels, and prices, which have recovered from seven-year lows, are far below the record highs reached in 2008.

"In this environment, who is going to want to buy your natural gas assets?" said Neal Shah, senior energy analyst at First America Funds in Milwaukee. "That is going to be a tough sell."

Much of the action in the North American natural gas market is focused on the development of shale formations like the Haynesville in Louisiana and the Marcellus in New York and Pennsylvania, areas where ConocoPhillips does not operate.

ConocoPhillips' North American natural gas production, much of it a legacy of its $36 billion acquisition of Burlington Resources in 2006, is in mature areas like the San Juan and Permian basins in the U.S. Southwest.

Shah speculated that smaller oil and gas companies are most likely to be interested in ConocoPhillips' U.S. gas assets if they were to be put on the block.

Large U.S. independent oil and gas companies like Devon Energy Corp (DVN.N) and Chesapeake Energy Corp (CHK.N) own a good base of natural gas assets in North America and are not likely to be interested in those fields, Benchmark's Gilman said.

Still, few attractive natural gas exploration and production assets have come on the market recently, so investment bankers said any decent properties will attract interest. But given the spread between oil and gas prices, even solid natural gas assets would generate less cash.

LUKOIL

Analysts and bankers point to ConocoPhillips' 20 percent stake in Russian oil major LUKOIL (LKOH.MM) as one of the company's most desirable assets.

"There you have a readily monetizable asset," Benchmark's Gilman, said.

Last week, UBS said ConocoPhillips may halve its share of LUKOIL, with likely buyers being institutional investors and possibly LUKOIL's top managers, Vagit Alekperov and Leonid Fedun. A sale of the stake, UBS said, could fetch as much at $48 billion for ConocoPhillips.

Still, others cautioned a LUKOIL stake sale is not without risk and its divestiture would shrink ConocoPhillips' exposure to crude oil.

"While this is the easiest sale to execute, a huge share placement of this kind would probably need to be done at a discount, and 'Russia risk' may limit the range of prospective buyers," Pavel Molchanov, energy analyst with Raymond James, said.

REFINING

The outlook for the refining industry is somewhat bleak. Crude oil and fuel stockpiles are hefty, hit hard by the global economic slowdown's toll on demand.

"We'd love to see them sell some of their refining assets, but in this environment it is going to be pretty tough," First American Funds' Shah said.

Paul Cheng, oil analyst at Barclays Capital, said after a meeting with ConocoPhillips' chief financial officer, that candidates for sale may include refining assets on the U.S. East Coast or in Europe, as well as the company's marketing or distribution assets in Europe.

"Conoco believes that out of all the areas in their U.S. refining portfolio, East Coast is the least integrated with their upstream operations and is also more challenged from a configuration standpoint," Cheng said in a note on Wednesday.

On the East Coast, ConocoPhillips operates the Bayway refinery in Linden, New Jersey, and the Trainer Refinery in Trainer, Pennsylvania.

In Europe, the company owns a 260,000 barrel per day refinery in Wilhelmshaven, Germany, and owns or has an interest in refineries in Ireland and Britain.

(Additional reporting by Mike Erman in New York; Editing by Steve Orlofsky)