ANALYSIS: Murphy Oil follows footsteps of Marathon, Conoco downstream spinoffs


Murphy Oil says it can unlock hidden value by spinning off its US fuel-making and distribution unit into a new company. Recent experience by rivals Marathon Oil and ConocoPhillips suggests it can be done.

The rationale behind such a move is that extracting oil and gas is a very different business from turning crude into gasoline and diesel and selling it.

At current oil prices, the upstream business has very high margins, and high risks. Refining and marketing, which the industry refers to as downstream, is lower-risk. But margins are much lower and very vulnerable to high oil prices.

For ConocoPhillips, the May spinoff of its fuels, petrochemicals and pipeline businesses into Phillips 66 has been a clear success, analysts say. The two companies now have a combined market capitalization of $98.5 billion, compared to ConocoPhillips’ pre-split valuation of $92 billion.

Phillips 66 shares have climbed 35% since the company was born, and management instituted a 25-cent dividend. Conoco shares have been nearly unchanged during the same period, closing at $56.79 on Monday.

“The ConocoPhillips spinoff definitely created value,” said Brian Youngberg, broker at Edward Jones. “ConocoPhillips was a dime before the spinoff, and now it’s two nickels, and the market likes nickels more than dimes.”

Marathon Oil and its spinoff Marathon Petroleum currently have combined market capitalization of $40 billion, up 13% from Marathon Oil's pre-split value of $35.2 billion.

Marathon Petroleum has risen 46% since its inception in July 2011 while its dividend increased to 35 cents in the third quarter. Shares of the standalone Marathon Oil closed down Monday more than 9% since July 8, 2011, the first week after the split.

Murphy announced Tuesday that it would jettison its ethanol refining segment, fuel distribution businesses and retail gas stations into a new company so it could focus its attention on improving its struggling oil and gas exploration business.

Analysts at Simmons & Co. International said the move could unlock $5 a share in enterprise value, or 8% of Murphy's current share price.

The caveat about past performance not predicting future gains holds, however.

"The spinoff is the easy part," Raymond James analyst Pavel Molchanov said of Murphy's announcement. "The hard part is taking the bulk of the upstream company and making sure that is being run in a more successful manner."

Dow Jones Newswires

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