NEW YORK (Reuters) – Marathon Oil Corp (MRO.N) said it will split off its refinery and pipeline operations into a stand-alone company, pushing its shares up 9 percent.
The move, which will take effect on June 30, 2011, will create the fifth-largest U.S. refiner and revives a plan the company had shelved in December 2008, when the financial crisis hit commodity markets.
Analysts and investors have long called on the Houston-based company to split into two to unlock value that Wall Street was overlooking.
"It's trading at a significant discount on earnings, cash flow and EBITDA to its peers," said Fadel Gheit, an analyst with Oppenheimer & Co. "I think the valuation gap will diminish significantly. We're talking about 20 and 40 percent upside."
Marathon made the decision because it had largely finished a major capital expenditure program that was running between $7 billion and $8 billion per year, Clarence Cazalot Jr, Marathon's president and CEO, told Reuters.
The financial and energy markets were also collapsing when the company was previously considering the split, he said.
"We are seeing strong financial and commodity markets that enables us to capitalize these companies much more easily," Cazalot said.
"The outlook that we see for the businesses in terms of their financial results is strong, and that's a significant change from two years ago."
GARYVILLE THE GREAT
Capital spending for the combined companies is expected to run between $5.0 billion and $5.5 billion, he said.
Earlier this week, analysts at Deutsche Bank said the company should split because Marathon's refining arm was outperforming its exploration arm, and its newly expanded Garyville, Louisiana, refinery was one of the lowest-cost plants in the country.
Last year, Marathon completed the expansion of its 436,000 barrel per day Garyville refinery low interest personal loan. The build-out, which improves feedstock flexibility and refined product yields, took four years and cost $3.9 billion.
The completion of the plant's upgrade allows Marathon to spin off the refining company in a strong financial position.
The company's six refineries are located in the mid-continent and Southeast U.S. markets and have 1,142,000 barrels per day (bpd) of crude oil refining capacity,
But another analyst was skeptical of the move.
"I'm not convinced it creates value. We've been through this a couple times with this name, haven't we? Making a decision like this in response to short-term market trends, in my view, is just not appropriate," said Mark Gilman, an analyst at The Benchmark Co.
Marathon itself was spun off of USX Corp in 2002, two decades after USX, then known as U.S. Steel Corp, purchased the company.
Prior to the spin-off, Marathon's refining arm plans to take on $2.5 to $3 billion in new debt to establish an initial cash balance of $750 million. Any cash above that level will be used to repay existing debt with the company's exploration business.
JP Morgan and Morgan Stanley will provide a $2.5 billion 364-day short-term loan to the refining company. The banks have also committed to provide Marathon Petroleum Corp with a $2 billion four-year revolving credit facility.
Marathon's shares rose 9 percent, or $3.66, to $44.19 in morning trading on the New York Stock Exchange.
(Additional reporting by Ernest Scheyder and Mike Erman in New York and Anna Driver and Kristen Hays in Houston, editing by Dave Zimmerman and Maureen Bavdek)
