Marathon Oil Corp.’s board of directors on Thursday gave the greenlight to two-year-old plans to separate upstream and downstream operations and form two independent energy companies.
Marathon would contain the upstream operations and continue to be headquartered in Houston. Newly formed Marathon Petroleum Corp. (MPC), which would house the refinery businesses, would make Findlay, OH, its home. The tax-free spinoff is expected to be completed by mid year.
“The substantial improvement in the global business and financial environments over the last two years has created the conditions under which we believe it is now appropriate to move forward with the formation of two strong independent energy companies,” said Marathon CEO Clarence P. Cazalot Jr. “Marathon has a long history of adapting to changing market and business conditions, and at this point in our almost 125 year history there is a compelling strategic rationale for this transformation.”
An uncertain economic outlook forced Marathon to shelve plans to spin off the refinery operations two years ago (see Daily GPI, Feb. 4, 2009).
“Complementary to the much improved economic environment, Marathon has largely completed a program of significant investment in both our upstream and downstream businesses that will provide each company with a solid foundation to be a leader in its respective industry,” said the CEO. “We expect these two strong and competitive companies will each have a sound platform for continued long-term shareholder value growth.”
The split is similar to one completed in late 2009 by Encana Corp., which spun off its integrated operations to form Cenovus Energy Inc. (see Daily GPI, Dec. 1, 2009). Questar Corp. last year spun off the midstream field services businesses to form QEP Resources Inc. (see Daily GPI, May 19, 2010).
“While we will move forward as two independent companies, Marathon’s long-held core values will continue to underpin the decisions and activities of each company,” said Cazalot.
According to Marathon, the split would afford the independent companies several advantages:
Marathon would operate and report through three segments: Exploration & Production, Oil Sands Mining, and Integrated Gas. MPC’s three business units would be Refining & Marketing, Speedway and Pipeline Transportation.
In response to the announcement, Moody’s Investors Service said it was reviewing the action for a possible downgrade.
“Separating Marathon’s upstream and downstream businesses would reduce the company’s present scale and eliminate the benefits of integration, which provide substantial support to its existing ‘Baa1’ rating,” said Moody’s Vice President Francis DJ. Messina. “If the company decides to proceed with this separation then the existing long-term rating likely would be downgraded one notch.”
However, analysts with Tudor, Pickering, Holt & Co. Inc. said “two companies are better than one.” The split, they said, “makes it easier for investors to own, much like recent Questar/QEP deal.” There’s also the potential for the upstream company “to become a more aggressive developer (driller) and/or acquirer.”
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