Market Overview

Breaking Up Isn't Hard to Do, Just Ask Oil Companies


Most readers of this space will probably need to ask an older friend or relative about Neil Sedaka. Back in the 1960s, the singer crooned a hit in "Breaking Up Is Hard to Do." Indeed it is, that is unless you're a big oil company. In that case, you love break ups, or spinoffs.

Add Arkansas-based Murphy Oil (NYSE: MUR) to the list of oil companies looking to unlock shareholder value by separating its retail business from its exploration and production operations. Spinoffs were all the rage in 2011 and the oil industry was no exception.

Marathon Oil (NYSE: MRO) got the ball rolling last year by spinning off its Marathon Petroleum (NYSE: MPC) refining business. ConocoPhillips (NYSE: COP), the third-largest U.S. oil company, announced a similar plan and when the oil giant reported fourth-quarter results on Wednesday, it said the spinoff should be complete sometime in the second quarter.

Analysts have opined that BP (NYSE: BP), Europe's second-largest oil company, should also consider exiting the downstream business in the essence of creating value for shareholders and raising cash to bolster its balance sheet and protect its dividend.

With a market value just south of $12 billion, Murphy is nowhere the size of ConocoPhillips or BP, but size aside, comments from today from Murphy CEO David Wood that his company is mulling a spinoff of its retail business have sent the shares soaring. In an interview with Bloomberg News, Murphy said investors can expect a decision regarding the separation of the retail business by the middle of this year.

There is a bull case for investing in refiners. However, a sluggish economy can suppress margins and if when parsing through earnings reports from major integrated oil companies, they usually blame earnings misses on one of two things: Problems in a volatile international market or weakness in their downstream operations.

Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies, have previously said they're committed to the integrated model. That doesn't mean other companies have to be and recent history has shown investors other oil companies are not committed to retail and refining.

Coupled with a plan to lower natural gas production, a move by Murphy to separate its retail operations could be the tonic to boost the shares, which were down 13% in the past year before the start of trading today.

Not to mention, a stand alone Murphy exploration and production outfit could be, and it's just speculation at this point, a possible takeover target. The market value of the E&P business would be just slightly in the large-cap spectrum and easily approachable for a cash-rich U.S. or European oil major. Murphy's international operations, including the oil-rich Kurdistan region add to the allure of a possible takeover sans retail and refining.

Maybe breaking up isn't so bad after all.

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