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Slick spin-offs

26 September 2013 By Christopher Swann

Breakups are one oil spill that’s welcome to spread. The spinoff of Conoco Phillips’ refinery arm last year fueled a trend that has created plenty of value among energy giants. Now oil service firms like Noble Corp and National Oilwell Varco are putting similar moves in the pipeline. It’s time for investment laggards like Transocean to catch up.

Conoco is proving big isn’t necessarily beautiful. Its value, when combined with that of the now-independent oil refiner, has risen by a third since the May 2012 split, far outpacing Chevron’s 13 percent increase and Exxon’s 6 percent drop. Both of those companies are still in the refining and exploration business.

Companies that supply equipment and other support to the energy industry have taken note. Noble’s proposed spinoff of its older drilling rigs is a case in point. While state-of-the-art deepwater rigs typically operate under multi-year contracts that largely shield them from commodity swings, older ones run under short term leases and remain idle when demand for oil is weak. The difference can be important in determining financial and business strategies.

Specializing in one area can also bring higher valuations. Seadrill, which concentrates on newer rigs, has an enterprise value of nine times next year’s forecasted EBITDA. That’s a hefty premium over the five times multiple of more diverse rivals like Transocean and Diamond Offshore. Both companies could unlock shareholder value by splitting.

Service company Weatherford International might also benefit from shedding itself of low margin businesses such as the division that maintains older oil wells. The company trades on an enterprise value of just six times 2014 EBITDA, while far more focused competitor Franks International trades at nine times 2014 EBITDA. Weatherford investors could reap the advantages of owning a firm that concentrated on the profitable business of well construction.

The evidence in favor of breakups is only growing stronger. That could leave oil service companies with only two options. They can either pursue spin-offs on their own, or wait until an activist investor comes along to do it for them.

 

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