ConocoPhillips shifts to a leaner strategy

Oct 29, 2009 (Houston Chronicle - McClatchy-Tribune Information Services via COMTEX) -- COP | Quote | Chart | News | PowerRating -- ConocoPhillips CEO James Mulva signaled a dramatic shift in course for the nation's third-largest oil company Wednesday, saying that after years of bulking up through acquisitions, it is now focused on being a smaller, leaner business that takes better care of its shareholders.

"Some will say what we're doing essentially is that we're shrinking to grow," Mulva said during a conference call to discuss the company's quarterly earnings. "That would be a fair assessment."

But the change is necessary in light of the global recession and the difficulty of accessing new oil and gas reserves around the globe, coupled with the massive costs of extracting them, he said.

At the heart of the strategy is a sweeping plan announced this month to sell $10 billion in company assets, the first details of which were revealed Wednesday.

Under the two-year program, the company is considering selling the bottom 10 percent of its producing assets in North America and some natural gas properties in the North Sea, Mulva said. It may also unload pipelines and terminals in the U.S. and its 9 percent stake in Syncrude, a joint venture to develop oil sands in Canada, as well as other assets.

The company intends to retain a "strategic relationship" with Russia's Lukoil, in which it owns a 20 percent stake, and has no immediate plans to sell oil refineries in the U.S. or abroad, Mulva said. However, it could look to sell less sophisticated and less competitive refineries beginning in 2012, once the struggling refining business improves and valuations for facilities rise, he said.

Delivering better returns

Mulva's comments underscore challenges facing major oil and gas companies and may even call into question the bigger-is-better, integrated business model that has prevailed in the oil industry for decades.

International oil companies including Exxon Mobil Corp., Chevron Corp. and BP have vastly increased their size in recent decades to expand their global reach, reduce costs and diversify asset bases as it's gotten harder to find and develop reserves.

ConocoPhillips, Houston's largest public company, with $225 billion in revenue last year, has followed the same course. In 2006, it purchased Burlington Resources for $35.6 billion in a deal that expanded its natural gas holdings in the U.S. but was criticized for being too costly and loading the company with too much debt. In the last quarter of 2008, the company had to write down $34 billion in assets stemming mostly from the Burlington deal.

Now, ConocoPhillips appears to be embracing a business model more akin to smaller, independent oil companies, which many investors prefer because they are more nimble and likely to deliver better returns, said Fadel Gheit, oil analyst with Oppenheimer & Co.

"He said shrink to grow. I mean, that is a new model for ConocoPhillips," he said.

Mulva signaled Wednesday that the evolution likely will include a greater focus on the company's exploration and production business and less on refining. After the asset-sale program, the company's portfolios will move to about 80 percent E&P, up from 70 percent to 75 percent today.

ConocoPhillips, the second-largest U.S. oil refiner, said it has no plans to close refineries permanently, despite a sharp downturn in the business that led Valero Energy and Sunoco to shutter plants. But it strongly hinted it could sell plants in coming years.

A year ago, Gheit said, he would have ruled out the possibility that ConocoPhillips would spin off its refining business. "I would not rule it out now," he said.

ConocoPhillips reported a 71 percent drop in third-quarter earnings to $1.5 billion amid a steep slide in crude oil and natural gas prices from a year ago and weak oil refining margins worldwide. Revenue dropped 42 percent to $41.3 billion. The results beat Wall Street expectations, yet the company's stock price fell $1.41 to close at $49.49 a share.

ConocoPhillips said that, for the first nine months of the year, oil and gas production was up 5 percent to 1.86 million barrels of oil equivalent and refinery utilization was higher than at the same point a year ago.

But in the third quarter, low natural gas prices in North America led the company to curtail 300 million cubic feet per day of natural gas production starting in late August, while poor refining margins forced it to slow output at refineries.

Boosting value

ConocoPhillips also said this month that it planned to cut its 2010 capital spending budget by 12 percent to $11 billion. The move, along with the asset sales, is designed to reduce debt, improve financial flexibility and boost shareholder value.

The company, which in January said it would cut about 1,300 jobs, or about 4 percent of its workforce, did not say Wednesday if further job reductions were planned.

When asked if he believes other oil companies will follow its downsizing lead, Mulva said not necessarily. But, he said, "I think longer term -- I can't speak for the other companies -- it's really changed from prior decades. It's going to take a somewhat different approach."

brett.clanton@chron.com

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