It’s not quite a Carl Sagan commentary, but one of the giant stars of the oil and gas firmament has burnt just a little too brightly in recent years, and is looking to conserve some of its energy as it hurtles forward.
Yes, oil prices are up to $80 a barrel again, but it is not all boom and expansion for Big Oil these days. While the high oil prices may tempt the majors into increasing their exploration and production activities, the global economic recession has led to a slump in demand for oil and an oversupply of refining capacity and hurt the oil majors’ bottom lines. But for one company the squeeze has been particularly painful. Burnt by some earlier investments, ConocoPhillips has targeted selling $10 billion in assets in 2010 in order to bring its debt-to-capital ratio under control, from 34% in mid-2009 to 20-25% by the end of 2010.
The global downturn exacerbated ConocoPhillips’ condition, but it did not cause the problem. The fact is that a decade of expansion and acquisitions (including the Conoco merger with Phillips Petroleum in 2002, Burlington Resources in 2006, and 20% of LUKOIL in 2004, left the company exposed to heavy costs. While the Conoco/Phillips merger proved to be a real value in terms of growing the company’s refining capacity and market share, the slumping economy and the underperformance of its LUKOIL and Burlington Resources investments prompted the company to post a $31.8 billion loss for the fourth quarter of 2008. The largest impairment charge it took in Q4 was a $25.4 billion write-down of the goodwill value (the difference between the purchase price and the book value of tangible assets) for exploration and production assets, mainly relating to the $36 billion purchase of Burlington Resources. It was also forced to reduce the value of its 20% stake in LUKOIL by $7.3 billion and lower the book value of two refineries by $537 million. The global economic slump continued hurt the bottom line in 2009 as well.
Consequently, in 2010 ConocoPhillips was pursuing plans to sell its 9% stake in Canadian oil sands operator Syncrude (valued at more than $3.3 billion) as part of larger program to dispose of $10 billion in assets by the end of 2011 in order to pay down debt. Other items on the chopping block include 10% of the company’s natural gas assets in Canada and the US, selected natural gas assets in the North Sea, and some pipelines and refineries and related infrastructure in the US. However, the company is not including its LUKOIL stake as part of the asset disposal plan. The company is also cutting its capital spending in 2010 to $11 billion, 12% down from 2009 and some 23% less than it spent in 2008.
ConocoPhillips CEO Jim Mulva sees the cuts as a necessary strategy of becoming smaller in order to grow, and while $10 billion in asset reductions may seem large, the company does have annual revenues of more than $152 billion.
A star is reborn?
~
Phillips Petroleum acquired Conoco in 2002. Jim Mulva was the CEO of Phillips prior to the “merger of equals” (technically a purchased acquisition).
Mr Hampton has some of his facts wrong. Phillips Petroleum has never been “purchased”. It was the other way around. Phillips purchsed Conoco. Admitting, the same affect – great merger (with debt).
Please get your facts correct. Phillips acquired ARCO Alaska and then Tosco to start this round of growth and Conoco acquired Gulf Canada, this was followed by Phillips acquiring Conoco and then Burlington.