NEW YORK, May 27 (Reuters Breakingviews) – Spinning off slow-growing, low-margin businesses is often an easy decision for companies as bosses prefer to spend time on more exciting parts of a firm. The performance of oil refiners like the $54 billion Marathon Petroleum (MPC.N) and the $48 billion Phillips 66 (PSX.N) over the past decade, shows the best thrills for investors can lie in the discards.
A decade ago, oil firms were minting profits. The price of oil held steady above $100 a barrel, and executives and investors questioned why companies like Marathon Oil (MRO.N) and ConocoPhillips (COP.N) were bothering with operations that refine the oil rather than just concentrating on pulling more out of the ground.
So Marathon Oil ditched this business, spinning it off in a deal that valued it at about $16 billion. The production business was worth 40% more at the time.
The picture has since inverted. Investors in Marathon’s refinery business have received a total return on shares and reinvested dividends of more than 650% in the past decade according to Refinitiv, while the oil production company only returned about 40%. Phillips 66 has returned about 70% more than former parent ConocoPhillips since spinning it off in 2012. Marathon Petroleum, the downstream business, has a market capitalization 2.5 times larger than the production business that it spun off.
This divide in returns could widen further. Refiners are earning $38 per barrel according to the industry’s way of calculating the spread between the purchase price of crude oil and the sale price. That’s near record highs. Refineries are full steam to replace production of products like diesel that has been lost as a result of sanctions on Russia. While capacity is being added in overseas markets where demand is rising, and President Joe Biden’s administration is even inquiring about restarting closed refineries according to Bloomberg, it’s unlikely much more will be built in America – and the last big refinery was built in the United States in 1977.
Big American oil companies like Exxon Mobil (XOM.N) and Chevron (CVX.N) have left their businesses integrated, arguing the combination offers flexibility, and the returns on the businesses are somewhat uncorrelated. But Phillips 66 and ConocoPhillips have outperformed both those firms since 2012. With returns like that, big oil companies might change their minds.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)