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Murphy latest US firm to disintegrate amid downstream shift

Murphy Oil’s decision to hive off its refining business is the latest and surest sign of an ongoing structural shift in the US downstream

On 16 October, Murphy said it would spin its marketing division – which includes 1,100 filling stations at Walmart locations – into an independent publicly traded subsidiary, Murphy USA. Murphy itself will carry on an exploration and production company with operations in the US, Canada and Malaysia. The UK assets are officially for sale.

“Separating these two businesses will allow each to unlock its own potential for growth”, Murphy’s chairman, Clairborne Deming, said.

The split was seen as a victory for activist shareholder Third Point, and its leader Dan Loeb, who urged Murphy to sell off is various segments on 3 October.

Call it dis-integration, or un-consolidation; splitting companies into their upstream and downstream components has become fashionable in the US transactional landscape.

Marathon Oil Corporation started the trend in January 2011 by shedding its downstream. ConocoPhillips followed, vesting Phillips with substantially all of its refining assets earlier this year.

Supermajors like BP have accelerated the trend by rationalising refining portfolios and shedding non-core assets such as the Texas City refinery near Houston to the newly-independent independents.

Until now, it is more a reorganisation of ownership titles than a consolidation of capacity. These are financial transactions, above all. Murphy shareholders will receive a special dividend of $2.50 and stock in the new company, which has pledged a share buyback programme of $1 billion.

It’s a positive way to start a business relationship, from an activist shareholder’s perspective. But not all analysts were sold on the merits of the deal. Despite a 10% jump in the value of Murphy’s shares to $64.60 after the deal was announced, Barclays’ analyst Paul Cheng downgraded the company’s outlook.

“We don't believe management will seek a piecemeal breakup or sale of the entire company”, he said in a research note. “We therefore value Murphy’s remaining assets as an ongoing entity.”

The move is a tacit acknowledgment that refining is likely to be a low-margin business as US demand for petroleum falls.

Total US oil consumption fell about 2.3% in the first half of 2012, to 18 million barrels per day (b/d), the lowest since 1995. Gasoline demand has fallen to the lowest levels since 1997, prompting the US to become a net exporter of refined products for the first time since the Second World War.

Without those exports, it’s likely that refineries in key markets in the eastern part of the country would be forced to shut down.

At the same time, domestic production is surging to its highest levels in 12 years, according to the Energy Information Administration. Upstream output is up about 10% in 2012, to 6.2m b/d.

Whereas the downstream will continue to spout steady streams of cash while providing opportunities for rationalisation and consolidation, there are new upstream realities for drilling new unconventional plays that require new spending. These include finding alternative sources of funding and finance, including joint ventures and foreign partnerships.

Producers once sought to vertically integrate to capture the entire value chain of production from wellhead to gas tank. Now they are frantically de-coupling those links. The shift is a response to the shifting fundamentals of higher supply and weakening demand.

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