Energy Business

The Great Energy Spin-Off Pipeline (MRO, MPC, TSO, TLLP, COP, BP, CHK, EP, XOM, CVX)

So far this year we’ve noted a couple of major spin-offs in the energy section. Marathon Oil Corp. (NYSE: MRO) spun out its downstream business into Marathon Petroleum Corp. (NYSE: MPC) and Tesoro Corp. (NYSE: TSO) has spun off its logistics and gathering assets into a master limited partnership called Tesoro Logistics LP (NYSE: TLLP).

There are at least four other significant spin-offs being planned or discussed in the sector. The largest perhaps is the planned spin-off of the downstream assets of ConocoPhillips Corp. (NYSE: COP). Chesapeake Energy Corp. (NYSE: CHK) has proposed plans to spin off a royalty trust to be called Chesapeake Granite Wash Trust and El Paso Corp. (NYSE: EP), in something of a reversal, plans to spin off its exploration and production assets while maintaining its midstream business.

Perhaps the most intriguing spin-off has not been announced yet, and may not happen at all. Several analysts have suggested that BP plc (NYSE: BP) should shed its downstream assets in an attempt to put the proper value on all of BP’s assets.  BP has neither confirmed nor denied any plans to split up, and a betting man would probably wager that until the fallout is better known from last year’s Gulf of Mexico spill the company will not make any major move.

Exxon Mobil Corp. (NYSE: XOM) recently unloaded an 88,000 barrel/day refinery in Malaysia, along with several hundred retail outlets in the country, but has made no noise about spinning out US refineries. Chevron Corp. (NYSE: CVX) has said that it definitely has no plans to split up its businesses.

Conoco has announced a spin-off of its refining assets.  Shareholders liked the news, but the company’s shares have not been able to hold onto the share-price boost that followed the announcement. That doesn’t mean that the split isn’t a good thing, but that other events have overshadowed it.

Chesapeake filed to form the royalty trust in early July and expected at the time to raise about $548 million from the deal.  The Chesapeake Granite Wash Trust will own revenue interests in natural gas and liquids production in the Granite Wash shale gas play in Oklahoma’s Anadarko Basin. Chesapeake continues to raise cash in any way it can to work off its $10 billion in long term debt. This spin-off was viewed by investors as just another deal to do that and had a slightly negative short-term impact on the share price.

El Paso plans to spin-off its E&P business, which generated about 40% of the company’s $4.6 billion in 2010 revenues.  The announcement boosted the company’s shares to a new 52-week high, but the stock price has pulled back about 10% since then. The new company’s assets include acreage in the Haynesville shale play, the Eagle Ford shale play, and a couple of other basins in Utah and Texas. Most of the production is cheap natural gas, with some liquids included. Realistically, El Paso’s E&P assets are most likely being prepped for sale.

Of the proposed spin-offs, El Paso’s has been the most well-received. But if BP decides to join the party, expect more interest in spin-offs to show up from the other integrated majors. That’s when things will really get interesting.

Paul Ausick

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