Conoco’s Mulva reverses rush to grow

Jim Mulva, chief executive of ConocoPhillips, has been in a hurry to establish his legacy. In the beginning, it was going to be as the head of one of the world’s biggest international oil and gas companies. And he got there, boosting Conoco into 5th place, in terms of production.

But then the economic downturn hit, and the weaknesses in his grow-through-acquisition strategy were exposed. It was no longer enough to be big, and Conoco was forced to slash capital spending, lay off staff and sell billions of dollars in assets.

The interesting thing is investors liked all the changes forced upon the company. That was because, while Conoco was getting bigger, there were serious changes taking place in the industry.

Conventional oil assets were maturing, and access to new resources was being increasingly controlled by oil-rich countries ranging from Russia to Venezuela. Not only that but these countries had developed their own state-owned oil companies, which began to compete globally for what assets were available. On top of that, the new plays that were open to the majors – liquified natural gas, Canada’s oil sands, and deepwater - were very expensive to develop and took years to yield results. Conoco, as the smallest of the majors, found it hard to compete. That is why, Mr Mulva explains, he is now going to split Conoco into two companies – one focused on exploration and production (E&P), the other on refining: 

“It’s a result of access, it’s a result of more and more competition. The opportunities to continue to grow as we have in the last 10 years have changed dramatically.
 
It turns out that the reasons for being one of the majors – which are characterized by having integrated portfolios that include not only refining but also E&P – no longer apply. Having a refining operation used to help companies gain access to exploration and production assets.

It also offset weaknesses in the upstream division when commodity prices were low. But Mr Mulva said those factors no longer applied.

One need only look at Apache or Anadarko Petroleum to know the independents – companies without refining – have been growing strong both nationally and internationally. Indeed, refining operations have become such a drag on integrated oil companies that they are on sale around the world. The drop in consumer demand amid the economic downturn and fears of tighter regulatory controls around carbon emissions have left many integrated oil companies negative on refining

But Mr Mulva insists that his own standalone refining company will be profitable by investing in pipelines, storage and other bits of the oil and gas business that it would never have done as an integrated oil and gas company. That makes sense. And it might be something BP mulls as it tries to find the right strategy following the Macondo disaster.

But analysts do not believe the other supermajors – ExxonMobil, Royal Dutch Shell or Chevron – will consider splitting off their refining into separate operations. They still believe the integrated model offers synergies, and these companies are strong enough to overcome the weaknesses of the model not to have to pursue Conoco’s path.

The reality is that Conoco has been under pressure for years to grow organically.
Mr Mulva insists his new standalone exploration and production company will make that a priority. But the company itself is going to be huge – Barclays Capital estimates it will have more than twice the proved reserves of Occidental Petroleum and Apache, its new peers. Fraser McKay, senior corporate analyst at Wood Mackenzie, the energy research firm, explains why this is an issue:  

ConocoPhillips’ challenge as a pure E&P play will be to prove to investors the growth potential for which the market has rewarded smaller niche players.  The recent deal by Marathon in the Eagle Ford was in many ways aimed at providing a robust growth story to get the E&P business out the gates. 

Conoco has until next year, when the split takes place, to come up with a “growth story” for its own standalone E&P company. That will enable Mr Mulva to then retire with a solid legacy firmly intact.

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