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Good COP, Bad COP

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July 14, 2011 – Comments (3) | RELATED TICKERS: COP , MRO

Man there certainly has been a lot of spin-offs lately.  Here's an interesting bit of special situation news.  ConocoPhillips (COP) just announced that it plans separate its E&P (Good COP) and refining / remarketing businesses (Bad COP).  The transaction will take place as a special dividend of the refining shares to existing shareholders prior to the end of June 2012.

Normally I would be interested in shares of the divisions that are being spun-off, but in this instance I love this move from the parent company's perspective.  I have a very low opinion of the refining and remarketing sectors of the energy world.  Yes, crack spreads are massive right now and refiners are making a ton of money, but they are so cyclical and can easily turn around.  Besides, while I realize that the sector produces more than just gasoline and that some of COP's refineries are outside of the U.S., it can't be a good thing for business when one has the government working against the use of their product in the form of ever increasing federal gas mileage standards.

What's left of COP should be fairly attractive, particularly if they are able to load up the spin-off with a ton of debt, along the lines of what NOC did with HII not that long ago.  EDIT: I guess that's not going to happen "All of the company’s existing corporate bonds will remain with the oil business, Mulva said on the conference call today."  Oh well, one can dream :).

Marathon Oil (MRO) saw its shares surge nearly 70% after it announced a similar plan to separate its E&P and refining businesses.  I highly doubt that COP will see its share price increase by that much in the short-run, but I still really like the move.

ConocoPhillips to Spin Off Refining, Marketing Arm as Mulva Set to Retire

http://www.bloomberg.com/news/2011-07-14/conocophillips-to-spin-off-refining-marketing-arm-as-mulva-set-to-retire.html

Deej

3 Comments – Post Your Own

#1) On July 14, 2011 at 9:47 PM, HarryCaraysGhost (99.62) wrote:

 From the article-

The spinoff will be done in the form of a special dividend to shareholders

Thanks Deej, any thoughts on what the special div might be?

Of course the share price would drop by that amount, but my experience has been that generally the share price recovers in a short amount of time.

(It was terra industries that is the whole of my experience (buyout), so take this with a grain of salt if I'm wrong.. :)

I agree that COP is the good cop here.

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#2) On July 15, 2011 at 10:14 AM, kenjotto (65.76) wrote:

HarryCarys -

 The dividend will be the shares of the new spun off company.  It's just going to be received in a shareholders account like a dividend.

 Deej - if all of the existing corporate bonds remain with the oil business, won't that radically skew their debt-to-equity levels in the short term?  COP is keeping the debt, but some of the equity goes with the new spinoff, doesn't it?  Could that put downward pressure on COP temporarily?

 Thanks,

 

Ken

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#3) On July 15, 2011 at 12:04 PM, TMFDeej (99.26) wrote:

That's a good point Ken.  I'm surprised that COP isn't trying to offload a bunch of its debt onto the refining business.  I would if I was in their shoes.  I guess that they really want to see refining succeed.

Deej

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