What Do These Oil Companies Have in Common?

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Oil and gas companies are focusing their efforts on providing the most valuable operations to their investors. While gas prices have risen steadily over the last 6 months, downstream operations are not the most profitable space to control. There is a new trend of oil and gas exploration companies selling or spinning off their downstream, retail operations in an effort to develop their core practice of finding and drilling for oil and gas.

Hess Corporation (NYSE: HES)

Hess Corporation announced last month it plans to sell its retail operations. Chairman and CEO John Hess said the company is “pursuing a multi-year strategy to transform Hess into a focused E&P company.” The sale of retail operations is only one track towards this goal.

Hess is also selling a number of its current assets. It plans on selling its Samara-Nafta division in Russia to the Russian oil company Lukoil. If this sale is approved by Russian anti-trust authorities, the proceeds will be $1.8 billion. The company is also selling an interest in an oil field in the North Sea, a shale deposit in Texas, and other positions in offshore oil fields near Azerbaijan. The total proceeds from these sales will be roughly $4 billion. Hess said it will use this to pay down debt and refocus on less risky assets.

The company is carrying $22.3 billion in total liabilities. The company has a decent quick ratio of .85 but its current ratio is right at 1. So, it has an incentive to reduce some of its total debt-load to maintain liquidity for daily operations.

With a new focus, the company expects a compounded annual growth rate for its production to be between 5 and 8% in the next few years. By 2014, the growth rate will likely be in the mid teens. More good news is coming to investors. The company is planning on increasing its dividend payout, as well.

Valero Energy Corporation (NYSE: VLO)

Valero just received approval from its board of directors to spin off the retail business CST Brands, Inc. 80% of outstanding shares will be distributed to Valero share holders at a rate of 1 share for every 9 Valero shares. These shares will be sold and the cash payments will be distributed to investors. The spinoff will occur on May 1.

The company currently owns and leases 1,032 retail gasoline locations in the United States and an additional 848 in Canada. In 2012, the company earned $348 million from its retail operations. That makes it the second most profitable division out of refining, retail and ethanol.

Initially, total income may slip but with the refocus on exploration and production it will quickly recover.

The company is also planning on selling its plants in California. During 2012, the company purchases refining plants in Louisiana and the United Kingdom and will be offloading some of its lesser performing plants.

Previous example

Hess and Valero aren’t the first companies to offload business divisions in pursuit of greater efficiency. In June of 2011, Marathon Oil Corporation (NYSE: MRO) spun off its refining and marketing operations to a new company, Marathon Petroleum (NYSE: MPC). This new company new operates 1,460 retail gasoline locations under the brand name Speedway. Since this divestiture, the stock price of Marathon Oil hasn’t changed much. But, Marathon Petroleum has seen a stock price increase of 122%. Wall Street analysts expect Marathon Petroleum to continue growing as its refining and retail sales increase. Some analysts even see a price target of $130 per share. This is largely due to its recent acquisition of a refinery from BP fueling future growth. The company also owns 71% of a pipeline company MPLX.

Final thoughts

Selling assets to refocus operations is nothing new for the oil and gas industry. Investors should see Hess’ actions as positive measures to ensure future success. Valero is following in the footsteps of a great case study in retail spin offs. Investors should be happy with both of these companies’ decisions on how to move forward.


Austin Higgins has no position in any stocks mentioned. He is the Principal Consultant for Avant Venture Group and focuses on building businesses through innovation, growth and investment. Read his company's blog at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.

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