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Parting Is Profitable

Why breaking up is easy to do for ConocoPhillips: Oil companies catch divorce fever

Divorce might be down among American couples, but it's quite the trend in the energy business. On Thursday, Houston-based ConocoPhillips became the biggest company to break up, announcing that it would be separating into two stand-alone companies.

Under the new plan, the refining and marketing business will be seperated from the more profitable exploration and production businesses. The split is expected to be completed in the first half of 2012, at which time ConocoPhilips CEO Jim Mulva told investors he intends to retire.

"Consistent with our strategy to create industry-leading shareholder value, we have concluded that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies," Mulva said in a press release. "Both companies will continue to benefit from the size and scale of their significant high-quality asset bases and free cash flow generation, allowing them to invest and create shareholder value in a changing environment."

According to The Wall Street Journal, the division would create the largest independent refiner in the United States, with Conoco processing 2.4 million barrels of oil per day, as well as the largest independent oil and gas producer.

'We came to the conclusion that [the split] was the best way to create value to our shareholders,' ConocoPhillips chief executive Jim Mulva said in a webcast conference call with investors.

WSJ points out that the break-up of ConocoPhillips could lead to a major shift for energy's integrated business model, noting similar but smaller splits in energy companies including Williams Companies, Questar Corporation, El Paso Corporation and Marathon Oil.

Some analysts consider ConocoPhillips's breakup plan a step toward the end of the integrated business model for major oil companies. Oil giants such as ExxonMobil Corp., Chevron Corp. and Conoco were born decades ago as companies that produce oil but also convert it into fuels. While gasoline demand was growing at a fast pace, the integrated model appealed to investors. In the last three years, however, the refining business became much less profitable than producing oil due to demand and excess capacity, said Fadel Gheit, an analyst with Oppenheimer.

"Chevron announced two years ago it was significantly reducing its refining operations while Exxon has said it will remain an integrated oil company. 'It remains to be seen if Conoco's aggressive move triggers deeper changes in its rivals,' Gheit said."

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