ConocoPhillips Lukoil sale a case of setting priorities

ConocoPhillips’ plans to halve its 20 per cent stake in Lukoil, Russia’s second biggest oil producer, had been discussed and discounted by many an analyst in the days before it happened. Few believed the sale would go ahead because the asset has been a good performer for Conoco and, amid the resource nationalism sweeping the world, big oil companies are trying to get into places like Russia – not out.

But the interesting thing about this economic downturn is that it has forced companies in the energy industry to think about what is really important to them. And while Russia is important to a lot of big oil companies, and remains so to Conoco, so are generating shareholder returns. And Conoco believes it must reward shareholders who have stuck with the company through the past year of difficulties, particularly if it can do so while also retaining a 10 per cent stake in Lukoil, its Russian relationship and a foot in that market.

The bottom line is that Conoco has a lot of strong assets around the world – and it needs to be in position to develop them. The economic crisis brought out the fact that it cannot keep buying and expanding, and still manage everything well.

That became clear when investors began pulling back from the company at the start of 2009, when Conoco said falling commodity prices had forced it to take a $34bn writedown on the reduction in asset values. At that time, the company announced 1,300 job cuts, scaled back capital expenditures and said it would move its focus from mergers and acquisitions to organic growth. Toward the end of the year, it annouced the asset sale plan.

It is not unusual. Look at Devon Energy. It, too, has decided to focus its efforts, despite being in some of the world’s key plays – Brazil and the Gulf of Mexico. The US independent oil and gas group said late last year it would sell its Gulf of Mexico and international assets for up to $7.5bn to pay down debt and focus fully on high-return US and Canadian onshore assets, which do not carry the risk that often comes with developing overseas projects.

Devon’s international assets are in Azerbaijan, Russia, Brazil and China. It already has done one major deal, in which BP paid $7bn (£4.6bn) for a set of assets from Devon, including licences in the oil-rich waters off the coast of Brazil. Again, Brazil was a good place to be, but it no longer worked for Devon, who has enough resources onshore to keep it busy.

So, while there are strategic reasons to be in different regions, the economic downturn has forced companies to set priorities. During the boom years, this was not necessary. Then, the game was to grab as many resources in as many parts of the world as one could pull off. Now is the time to pick and choose.

Related links:

BP buys $7bn of Devon’s assets, and makes a Canadian oil sands deal (FT Energy Source)
Energy sector M&A to pick up in 2010 (FT Energy Source)

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