HOUSTON (Reuters) - ConocoPhillips (COP.N) said it plans to sell half of its 20 percent equity stake in Russian oil major LUKOIL (LKOH.MM) in the open market, divest some assets and reduce refining capacity as part of a two-year plan to boost returns and reduce debt.
Conoco lags its oil major peers in returns. The company has big exposure to a weak refining market, and its exploration and production assets in North America are tilted toward less-profitable natural gas.
The Houston company released a bare-bones plan to revive its finances five months ago, which included the sale of $10 billion in assets.
At the time, investors and analysts speculated that Conoco might sell part of its stake in LUKOIL, and last week Reuters reported that Conoco had decided to do so.
It is "more appropriate " for the company to use proceeds from part of its LUKOIL interest to increase shareholder value through stock repurchases, Jim Mulva, Conoco chief executive, told the company's annual meeting with analysts. But he also said it was important for the company to remain in Russia.
One reason Conoco decided to pare its interest in LUKOIL was slower-than-expected access to some projects, Conoco investor relations executive Clayton Reasor said, declining to provide any specifics.
LUKOIL would be the most likely buyer of the 10 percent stake, which is worth $4.9 billion, analysts at Raymond James said in a research note.
LUKOIL Vice President Leonid Fedun told analysts in London that his company would not rule out buying shares from Conoco, but added that the Kremlin could oppose such a move.
"If they sell the stake back to LUKOIL, I think they might get a lower price," said Phil Weiss, oil analyst with Argus Research. He added that the process would likely go smoothly because Conoco would be selling in the open market.
LUKOIL, Russia's No. 2 oil company, regards Conoco as a strategic partner and many analysts see the presence of the U.S. major in LUKOIL's capital as a guarantee that the Kremlin treats LUKOIL more carefully than its peers.
Conoco had a number of meetings with LUKOIL and Russian authorities before the share sale plan was announced, Reasor said.
Conoco said potential dispositions in 2010 include its interests in the Syncrude oil sands project in Canada and the Rex pipeline in the U.S., 10 percent of its Lower 48 and Western Canada portfolio, and its remaining gasoline retail operations.
About half of the assets will be sold in 2010, and the remainder in 2011, the company said.
Conoco also said it is reducing its crude oil refining capacity to 2 million to 2.2 million barrels per day in 2012 from 2.7 million barrels per day in 2009 as it looks to cut exposure to a weak market for fuels.
No plants will be put up for sale now because those assets would fetch a low value, but Conoco said it will look at ways to monetize its refining business in two years or more.
The company also said it plans a $5 billion share repurchase program and will raise its dividend 10 percent.
The third-largest U.S. oil company said it expects per share production growth of 3 percent in 2010 and 2011 and 3 percent to 5 percent in subsequent years.
LUKOIL's Fedun said planned tax breaks in Russia mean its cash flows could rise and the Kremlin could object if this money was spent buying back the shares.
"The political leadership of the country may see it negatively," he said.
He added that any purchase would depend on LUKOIL's other financial obligations and said he himself would not buy the shares. Fedun already owns 9 percent of LUKOIL.
LUKOIL missed forecasts when posting a 23 percent drop in 2009 profit on Wednesday.
Conoco's shares were 14 cents higher, or 0.3 percent, at $52.65 in afternoon trading on the New York Stock Exchange. LUKOIL shares closed down 0.9 percent in Russia.
Additional reporting by Tom Bergin in London and Robin Paxton in Moscow; editing by John Wallace and Gerald E. McCormick