Oil companies are not typically the stuff of break-up actions. What would be the purpose of knocking Exxon Mobil (XOM) or Conoco (COP) into two pieces?

Some of the answer to that comes from Canada. Encana, one of the largest oil and gas companies in the world, will cut itself in two. One new company will run the oils sands business of Encana. Another will handle natural gas.

A look at Exxon’s "upstream" operations, which handle exploration and production shows that those businesses are growing quickly, especially outside the US. Earnings at the overseas "upstream" divisions  at Exxon were  $7.2 billion in the first quarter of this year compared to $4.9 billion in the period a year ago. The US earnings also grew from $1.2 billion to $1.6 billion.

"Downstream" operations at Exxon, which include refining and distribution, have done more poorly recently. The businesses had decreases in net income in the first quarter. The earnings drop in the US part of this company was more than 50% from $839 million last year to $398 in the most recent period. The refining industry has more and more obstacles as it get less margin out of the products it yields.

Exxon’s chemicals operations have also encountered rough going. Earnings in the US and overseas both dropped by double digits.

The "upstream" businesses at Exxon clearly carry a higher valuation than the balance of its operations. There is a lesson in Encana’s move.

Exxon may be worth more in three pieces than it is a single conglomerate.

Douglas A. McIntyre

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