The Spinoff Marathon Continues

Marathon Oil Tower, the headquarters of Marath...
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Another day, another spinoff. Marathon Oil (MRO) announced today that its Board of Directors has approved spinning off its downstream operations. The new company will be called the Marathon Petroleum Corporation (MPC – also its expected ticker) and will be one of the largest refiners in the United States with assets concentrated mainly in the Midwest, Gulf Coast and Southeast.  MRO will retain the company’s ‘upstream’ assets and will focus on exploration and production. The company will distribute one share of MPC for every two shares of Marathon held at a currently unknown record date, but the split is expected to be effective June 30, 2011.

It is always important to follow the debt involved in these transactions and both financing and debt arrangements have already been made for the new company. MPC plans on incurring $2.5-3b of new debt in order to begin with a cash balance of at least $750m. Additionally, the company has secured a $2b revolving credit facility from JPM and MS. MRO plans on reducing its LT debt by $2.5b. MRO currently pays a dividend of $1.00/share and both companies plan to maintain a quarterly payout. According to the press release, “MRO will pay an initial dividend of $0.15 per quarter or $0.60 per year (based on approximately 710 million shares outstanding) and MPC will pay $0.20 per quarter or $0.80 per year (based on an estimated 355 million shares outstanding).”

This transaction is not really all that surprising though, as Marathon has been considering this split for quite some time. It shelved its spinoff plans in 2008 due to the unfavorable market environment (I would say good move there), but according to CEO and President Clarence P. Cazalot, Jr., the time is now right due to “the substantial improvement in the global business and financial environments.” The rationale for the split has not changed and the company hopes the split enables each individual unit to be properly valued and judged versus its peers. The refining business typically has low margins, especially when compared to those of the exploration segments. So far, the reaction from the market has been positive and the stock is up over 8% as of this writing. Some other reasons mentioned by the company include the “enhanced flexibility to pursue tailored strategies [and] the strengthened ability to attract and retain talent.”

Much like ITT’s situation yesterday, the large gain in the stock price somewhat limits the opportunities to profit from the spin as the ‘unlocked value’ starts to get priced in, but this situation is certainly worth following. A conference call is scheduled for this morning to discuss the spinoff and we will keep you updated as more information is released.

It’s also interesting to note that much like ITT  with its history of spinoffs, Marathon spun off US Steel in 2002. Some companies just can’t stop breaking up.

Disclosure: Author holds no position in any stock mentioned.

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