Big Oil gets another lesson from split at Williams

February 17, 2011

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Maybe now Big Oil will take notice. Williams has followed mid-size peer Marathon Oil with a carve-up plan. The decision to separate the pipeline and exploration businesses immediately boosted Williams’ market value by about $1.5 billion. It’s becoming more apparent that yoking such different operations together obscures value.

The benefits of clarity have been progressively shining through. A year ago, Williams rejigged its corporate structure to help shareholders distinguish more easily among its jumble of assets. Then, too, Williams was rewarded with an immediate boost of around $1.4 billion. Since then, even before Thursday’s announcement, the shares had gained nearly 30 percent.

Marathon accrued similar benefits. Its decision earlier this year to spin off its refining and exploration businesses delivered an immediate 10 percent lift to the shares.

The conglomerate discount applied to energy integration is becoming clearer. The union between dynamic wildcatters and the more sedate pipelines and refining never made much sense for shareholders. Running two such radically divergent businesses demands too much of senior executives and surely reduces their focus. It also makes valuation all the trickier.

In the case of Williams, investors will now have a clear choice. They can opt for a high-yield pipeline business, with slow but steady growth, or a more racy exploration company that is making bold bets on shale oil in North Dakota’s Bakken Formation.

The oil majors should be cottoning on to the idea. If the experiences of Marathon and Williams are any guide, then splitting up the giants could unlock huge value. A 20 percent boost to Exxon Mobil’s valuation — roughly what Oppenheimer believes a breakup could generate — would be worth around $80 billion alone.

So far, however, Big Oil has been deaf to such arguments. They cling to the belief that the natural commodity hedge and technology cost-savings of keeping the two businesses stitched together is the better option. Instead, the next most likely to follow is the smaller El Paso, a $12.7 billion hodgepodge of pipelines and exploration. It could take a third story of breakup success to convince the bigger wildcatters to go solo.

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