ConocoPhillips, the largest U.S. refiner, announced yesterday that it plans to split into two separate companies. One would take charge of production and exploration, while the other would operate in refining and marketing.
Shares of the company jumped 7.7% on the news but some concerns have emerged after the initial high.Deutsche Bank analyst Paul Sankey:
- The major concern is that ConocoPhillips’ refining and and marketing arm was generating $1 billion – $2 billion in free cash-flow which supported its upstream (exploration and production) projects. Without that cash, the market doesn’t think ConocoPhillips can grow.
- The announcement took the company by surprise, and valuation shows a limited upside. He says, “COP is still trading richer than Chevron and hence the split announcement does not trigger any great valuation upside, in our view; it is a strategy and focus win, not a valuation one.”
Barclays analyst Paul Y. Cheng has many concerns over the spin-off:
- Over the past six – nine months management had denied the long-term value of a spin-off to investors. So it remains uncertain why they had an about-face.
- Other concerns have to do with new leadership, now that CEO Jim Mulva has said he will resign at the end of the split. The future of its joint ventures, the new capital structure for the refining and marketing company and and the energy & production company’s growth plans continue to be major concerns.
- Investors are asked to sit on the sidelines for this stock because while it could be worth more given that the energy sector is undervalued, there are better options in the market.
Citi analyst Faisel Khan says there are three key things to watch for:
- ConocoPhillips’ manner of dealing with joint ventures in the new refining and marketing company.
- It remains unclear what will happen with ConocoPhillips’ midstream i.e. processing, storing and transporting business, and its chemicals business.
- Growth in its upstream business i.e. exploration and production company will be difficult, but with most of its assets in OECD countries the valuation could look better.