This morning I caught a WSJ article about ConocoPhillips cutting capital spending and selling a huge amount of assets ($10B). This comes on the heels of yesterday's announcement that ExxonMobil, Conoco's main rival, closed on a reasonably large acquisition (~$4b) in a Ghanian oil field.
It appears as though Exxon and Conoco are moving in different directions. Why is that?
Well, I think the story cuts a little deeper. And to explain why, I'll rehash a little bit of the news story, then give a little context in the energy sector, and then give my spin on what I get from this article.
According to today's article, Conoco is drawing down it's 2010 capital expediture budget and raising cash by selling assets. This is after the company previously decided in 2009 to lay off employees and cut 2009 capital expenditure budget. Proceeds from the sale of assets is set to go to lowering debt obligations.
That's the bad news. The good news, for Conoco shareholders at least, is that they plan on raising the dividend 6.4%
Exxon has cut a bit of a different path over the last 18 months. While Conoco has been cutting costs, Exxon has been spending. According to a WSJ article in March 2009, Exxon raised its capital spending 11%, even as oil prices plummeted to below $45 and margins were squeezed.
The entire energy sector runs on capital spending by upstream exploration and production companies, like Exxon and Conoco. All drilling, services, transportation, storage, refiners and marketers that operate in the oil and gas space depend on upstream exploration and production companies continuing their development, exploration and production operations. When the upstream shuts down, everything down the value chain suffers.
Capital spending is extraordinarily important for these upstream entities because global reserves of oil and natural gas a.) is no cheap thing, and b.) are very limited. It's not easy to find new production. State owned entities (Saudi Arabia, Iran, Russia) control much of the world's viable oil producing geography. That which is not claimed is not easy to get to. So cutting capital spending and reducing assets will usually mean that the company will not be able to match previous production capacity for quite a while.
But what I really think is happening here is: Conoco is circling a potential acquisition in mid-2010. I think they're cutting debt to create space for acquisition debt. I think they're shedding assets to free up some liquidity to deploy later. And I think they're raising their dividend to juice their stock price a little bit. All of these present acquisition opportunities (increased debt and cash for a traditional acquisition, increase value of shares to make a stock-for-stock transaction easier). Conoco knows that Exxon is running away from them, and they need to increase production. They can't keep up as cash strapped as they are. So they'll shed some weight now - including some assets that come from their refineries, an industry which is strangled by a huge overcapacity. So that's not a loss.
The WSJ article about Conoco can be found here: http://online.wsj.com/article/SB10001424052748703298004574459160822113116.html?mod=WSJ_hps_LEFTWhatsNews
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