ConocoPhillips (COP) has surprised the market with its decision to split its operations into two. The third biggest U.S. integrated oil company plans to separate its upstream oil and gas exploration and production unit from its downstream refining division into two standalone, publicly traded corporations.
The spin-off, which is subject to market conditions, regulatory approvals and the receipt of a U.S. Internal Revenue Service ruling that endorses its planned tax-free status, is expected to take effect in the first half of 2012.
The move will result in the creation of the largest refining company in the U.S. (with a capacity of 2.4 million barrels per day) and the largest exploration and production player based on oil and gas reserves.
This announcement has broken the bigger-is-better myth. The idea behind this split is to create value for shareholders who like the volatility in the refining business. It is also believed that the creation of two separate companies will allow both to pursue greater opportunities in their respective market segments, without the constraints of the parent company, and better serve the needs of both investor groups.
The strategies at both companies to return cash to shareholders will remain unchanged. Over the past two years, ConocoPhillips has been in a restructuring program to sell up to $17 billion in assets and reduce its debt load, simultaneously buying back shares and increasing its dividend.
ConocoPhillips has already raised more than $10 billion by shedding stakes in Canadian oil sands and Russia's Lukoil. Post-split, the upstream venture will look to buy back shares in 2012, when the transaction is expected to be complete, while both companies will pay dividends.
ConocoPhillips has a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We are also maintaining our long-term 'Neutral' recommendation on the stock.
BP Plc (BP) and Chevron Corporation (CVX) are major competitors of ConocoPhillips.
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