ConocoPhillips and Lukoil Exit… Some or All (COP, XOM, BRK-B)

ConocoPhillips (NYSE: COP) is living up to its promise, or at least trying to live up to the promise of selling some $10 billion in assets.  According to reports from Reuters and from Dow Jones, the company has told OAO Lukoil Holdings that it plans to sell half ConocoPhillips’ stake in Lukoil.  ConocoPhillips acquired a 7% stake in Lukoil in 2004, but its interest grew to about 20% since that time.

The Russian oil giant is 20% owned by ConocoPhillips, which means that there would still be a 10% stake held.  Some may interpret this as a signal of the end of what has been one of the few success stories of outside oil companies dealing in Russia.  That may not be the case because ConocoPhillips would like to have upside if more partnerships emerge in Russia.  It is not the easiest country to invest in despite it having perhaps the largest oil reserves.

We have expected more sales by ConocoPhillips as it promised in late-2009 to sell assets to focus its strategy and to bolster its balance sheet.  This is a restructuring of some sorts, although we still consider this more of a refocus with a tighter scope rather than a pure restructuring.

Conoco has also previously noted an intent to hold on to the Lukoil stake, although there are discrepancies over the interpretation of this stance… holding “a stake” versus “the stake” is the issue.  If the reports are gospel, then it is “a stake” remaining.

ConocoPhillips acquired a 7% stake in Lukoil in 2004, but its interest grew to about 20% since that time.  Whether this sale is to Lukoil itself is still up for debate.  Some reports have noted that Lukoil will not exercise its preemptive right to buy the shares first.  Unloading a 10% stake gradually on the market will not exactly be the fastest exit strategy, but it will also maximize the share price over just dumping a significant share volume on the open market.

ConocoPhillips has a market cap of $77 billion today. At $52.27, its 52-week trading range is $37.52 to $54.13.  At the peak of the energy stock cycle in 2008, ConocoPhillips traded north of $90.00.  Over the last two years, its shares have lagged in relative performance against Exxon Mobil Corp. (NYSE: XOM), but this restructuring or refocus has allowed it to significantly outperform Exxon Mobil over the last year.  In the last year we have seen a move of almost 40% in ConocoPhillips versus a move of under 5% in Exxon Mobil.

Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) most recently disclosed that it has continued to unload its position in ConocoPhillips.  In its most recent holdings, Berkshire Hathaway said it still had 37.7 million shares, down from 57.43 million shares a quarter before and down from 62.485 million at the end of June-2009.

JON C. OGG