El Paso reminds Big Oil breaking up is easy to do

May 24, 2011

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

NEW YORK — Divorce is all the rage for energy investors. The modest lift the $15 billion El Paso got from cleaving wildcatting from pipelines may not do justice to market enthusiasm since the move had been expected. But trailblazers like Marathon also have held onto their split gains. Oil majors now have a full body of evidence of what investors want.

It was merely a question of when El Paso would take this step. Ever since pipeline and exploration rival Williams divided in February, shareholders have been expecting El Paso to follow suit. Indeed, in the two days following the decision by Williams, El Paso shares gained 6 percent. Tuesday’s 6.5 percent increase, which added another $1 billion of market value, represents at least the second installment of El Paso’s reward.

History suggests the rise won’t be ephemeral either. Other carve-ups have led to share prices stabilizing higher. Williams’ have hung onto their 10 percent gains. Marathon Oil has done even better since its split in January — turning a 6 percent day-one rally into a 24 percent upswing. By comparison, refining-heavy and still-integrated peer ConocoPhillips has risen just 4 percent.

These splits should by now be commanding the attention of bigger oil groups. While few executives want to leave a business smaller than they found it, shareholders have made their views clear. The skills required to run speculative exploration are very different from the obsessive operational focus demanded by refining or pipelines. And valuing such ungainly combinations is a headache investors could do without.

Meanwhile, few investors subscribe any longer to claims by the biggest oil producers that integration delivers technology synergies, helps pry open foreign markets or provides valuable hedging opportunities.

For titans such as $400 billion Exxon Mobil, the value released by breaking up could be enormous. Matching the 10 percent gain achieved by Williams, for example, would deliver a $40 billion value boost. And analysts at Oppenheimer reckon the lift would be closer to the 20 percent gain enjoyed by Marathon. Either way, the affirmation provided by El Paso makes it harder for Big Oil to ignore.

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