The End of the Integrated Supermajor Oil Companies?

[GRG55]

I have previously posted that the supermajors, which were formed in the last low-oil-price M&A cycle, are slowly going out of business - unable to maintain production rates and unable to replace reserves...other than through desktop reservoir engineering studies.

These companies, formed by combining some of the largest multinational oil companies in the world [BP-Arco-Amoco, Chevron-Texaco, Exxon-Mobil, Conoco-Phillips, etc], have also had difficulty making consistent profits from their downstream refining and marketing activities.

This morning ConocoPhillips CEO Jim Mulva announced that the company is going to be split into a separate upstream E&P company and a downstream refining and marketing company. Mulva plans to retire immediately after the split.

The benchmark for the upstream are companies like Anadarko, which has a pretty good E&P track record. Could we be seeing the end of the "supermajor" company model?

Regardless, it is the bankers that always make the money. Fees for promoting the mergers, and more fees for organizing the inevitable divorce...

ConocoPhillips Plans to Split in Two

Jul 14, 2011 5:58 AM MT

ConocoPhillips (COP) said it would spin off its refining and marketing arm into a new business, two weeks after Marathon Oil Corp. (MRO) split itself up to increase returns for investors.

ConocoPhillips, based in Houston, will divide into two stand-alone, publicly traded operations. The division is expected to be completed in the first half of 2012, the Houston- based company said in a statement today...

...ConocoPhillips is the second-largest U.S. oil refiner with capacity of 2 million barrels per day, according to its website. It owns 12 U.S. refineries, and has a two-refinery joint venture with Alberta-based oil producer Cenovus Corp. The plants account for about 10 percent of U.S. refining capacity, according to data compiled by Bloomberg...

...Following the split, ConocoPhillips’ refining arm will be the largest U.S. independent refiner, with more capacity than Valero Energy Corp., according to data compiled by Bloomberg.

ConocoPhillips also owns five refineries outside the U.S...

[jk]

Re: The End of the Integrated Supermajor Oil Companies?

i understand the split-company idea as aimed at market cap, but i don't see how splitting off the e&p operation is going to make it any more successful at replacing reserves. is the notion that the combined structure somehow prevents good management for the e&p operation?

[c1ue]

Re: The End of the Integrated Supermajor Oil Companies?

My guess is it is the opposite argument to the consolidation one.

Consolidation: by merging you achieve synergy in operations and cross marketing.

Division: you allow each sector to compete and show its success independent of the others.

No question in my mind that the banksters are just pushing the other side of the coin from their sales pitch view, the question is if oil exploration/refining show any unique characteristics by which consolidation actually did reap benefits.

Certainly on the banking side the benefits of consolidation were primarily political...

[VIT]

Re: The End of the Integrated Supermajor Oil Companies?

Marathon Oil just finished the split between downstream and upstream segments. Now its 2 independent companies.

One of the reason for splitting is to show competitive metrics vs pure upstream companies. Another reason might be that oil companies do not afraid anymore of prolonged crude price declines. When it happened in the past downstream business was a good protection.

[World Traveler]

Re: The End of the Integrated Supermajor Oil Companies?

I spent 30 years at an integrated, very large multinational oil company. I worked in IT, but most of the IT work I did was for the Downstream, specifically the Marketing department.

I was a project manager for IT systems used by the Marketing department, so I intereacted quite a bit with the "marketeers".

One things they used to complain about is the "transfer price", the price at which the Upstream "sold" ( a book-keeping entry) oil and gas to the Downstream, within the company. They used to complain it was extremely difficult to make a good profit at the "transfer price". Since each department had an independent P&L, before the books were consolidated at a corporate level , this "paper price" did matter to them. Typically Exploration and Production always looked good, Downstream not so much.

A while back Michael Hudson did a good job of explaining the politics of how the transfer price is set. It's influenced by tax policy and other factors that enable a corporation to maximize overall profitabilty. These factors have tended to favor the Upstream over the Downstream.

[GRG55]

Re: The End of the Integrated Supermajor Oil Companies?

i understand the split-company idea as aimed at market cap, but i don't see how splitting off the e&p operation is going to make it any more successful at replacing reserves. is the notion that the combined structure somehow prevents good management for the e&p operation?

They are quite different businesses, with much different risks, capital demands, and strategies. I was never a fan of the creation of the "supermajors".

The multinational integrated oil company I worked for early in my career had an international upstream exploration and production [E&P] business, an international commodity chemicals business [largely petroleum based plastics feedstocks and fibres] and most years was the largest domestic USA marketer of motor gasolines [neck and neck with Shell]. I had the opportunity to see first hand the difficulties managing across this range of businesses.

For example, the success of the refining and marketing business was based almost entirely on product differentiation and a very narrow slicing and advertising targeting for each of the three grades of gasoline and in each of the market segments, including differentiations designed to appeal separately to whites, blacks and Hispanics. Interestingly, the marketing business rarely made money selling the gasoline itself. The gasoline was the draw to get the traffic. Apparently large numbers of motorists have high brand loyalty - they want to think they are buying a higher quality product - but none are willing to pay any more for it than the posted price across the street [that's one of the reasons all the prices go up and down in unison at all the stations on the same corner]. By far the highest margin product at the petrol stations was coffee - far, far more profitable than gasoline. The marketing dept knew to the fraction of a penny exactly what it cost to supply a cup of coffee to a customer [including the stir stick!]. Of course to get people to buy coffee [and cigarettes, and candy bars, and...] you have to get them out of their cars and into the store. Decades ago self-serve was the first step in that process. Other steps included joint-ventures with fast food chains, such as McDonald's, to offer limited menu outlets co-located with the store. It was a marriage made in heaven, as the petroleum companies had all the fabulous legacy locations on the best street corners, and the fast food companies that were at saturation needed to gain access to better traffic locations. However, to show you how tough a business it really is, the advent of credit and debit card readers at the pump is defeating marketing efforts as customers still have to get out of their vehicles, but no longer have to enter the store to complete their transaction - and that cuts into the impulse buying.

The E&P business is completely different. There is no ability for product differentiation when one is producing a fungible commodity. At the end of the day there is only ONE business strategy. You have to be among the low cost producers to survive during the bottom of the price cycles. E&P is one of the most technically intensive and capital intesive businesses on the face of the earth, but that part of it doesn't matter one bit if you aren't low cost, low cost, low cost.

As for commodity chemicals, if there is one business that makes E&P look easy it is commodity chemicals. This is a deep cyclical business, very sensitive to the economic cycle, with no where near the "inelasticity" that crude oil exhibits. Another example: once the housing market rolls over, there goes the market for carpet backing fibres, and a whole host of other products. The customers for most commodity chemical producers are other chemical companies - BASF, Dow, and now the Chinese. There's no product differentiation, and forget about making up the margin loss by selling them coffee and nicotine...

Frankly, I defy any executive team or Board to optimally manage across this range of businesses. For the first sixty or seventy years of the petroleum industry being vertically integrated was important because the only way to increase production was to create markets to get rid of the stuff. That has long ceased to be necessary.

[GRG55]

Re: The End of the Integrated Supermajor Oil Companies?

I spent 30 years at an integrated, very large multinational oil company. I worked in IT, but most of the IT work I did was for the Downstream, specifically the Marketing department.

I was a project manager for IT systems used by the Marketing department, so I intereacted quite a bit with the "marketeers".

One things they used to complain about is the "transfer price", the price at which the Upstream "sold" ( a book-keeping entry) oil and gas to the Downstream, within the company. They used to complain it was extremely difficult to make a good profit at the "transfer price". Since each department had an independent P&L, before the books were consolidated at a corporate level , this "paper price" did matter to them. Typically Exploration and Production always looked good, Downstream not so much.

A while back Michael Hudson did a good job of explaining the politics of how the transfer price is set. It's influenced by tax policy and other factors that enable a corporation to maximize overall profitabilty. These factors have tended to favor the Upstream over the Downstream.

This isn't the full story. There is no longer a match in any individual integrated company between the volumes it produces in the E&P division and the volumes it needs as feedstock in the downstream refining and marketing division. Hence the notion of a "transfer price" died a very long time ago. Refining divisions have to compete for supply on the open market and E&P companies have ample opportunity to maximize their price by selling outside the captive downstream business, and by hedging production should they wish. There is no reason any E&P division should sell output to the downstream division at prices lower than that downstream division is paying for external supply.

Downstream divisions that complain that they are not sufficiently profitable because the "transfer price" is too high are simply vocalizing how lousy the refining and marketing business in a mature, highly regulated market really is.

[GRG55]

Re: The End of the Integrated Supermajor Oil Companies?

The investment bankers apparently have a new strategy to generate lots of fees...after all, breakin' up is hard to do...

BP Breakup Worth $100 Billion to JPMorgan

Jul 24, 2011 5:01 PM MT

Robert Dudley could unlock $100 billion for BP Plc (BP/) investors by following ConocoPhillips and splitting up Europe’s second-biggest oil producer...

... JPMorgan Cazenove said last week BP’s assets are worth about about 800 pence a share, equal to a total market value of about $248 billion. The company currently trades at about $147 billion.

“On a sum of the parts basis, BP is ludicrously undervalued,” said JO Hambro Capital Management Group Ltd.’s Clive Beagles...

...BP’s 40 percent discount to the total value of its assets compares with an industry average of 27 percent, JPMorgan Cazenove analyst Fred Lucas said...