The oil and gas company Exxon Mobil’s (XOM) decision to sell its Japan unit seem to have been taken in the midst of weak outlook for petroleum products such as gasoline and others. This apart, Japan Government’s order to improve plants for more fuel crude resulting in higher operational costs also weighed in favor of divesting the unit. The move is also considered as reducing exposure in refining in the wake of weak margins hurting the company’s bottom line.
The latest step of the largest oil and gas company comes amidst other companies shifting their focus towards more profitable business within the petroleum space.
The Irving, Texas-based Exxon Mobil disclosed that it struck a deal with TonenGeneral Sekiyu, for the sale of its Japanese unit for $3.9 billion. The deal allows Exxon to divest a 99 percent hold in its Japanese unit to TonenGeneral. The Japanese company will use the cash at its disposal besides bank credit to fund the acquisition. Exxon’s Japanese subsidiary produces and sells fuels.
Of late, scores of companies are shying away from refining, particularly in developed nations, where weak demand for gasoline and other products hurt profit margins. The slow down in the economic activities during the last few years and the current conditions also paint a bleak picture to emerge in the near future.
British Petroleum (BP), which was hurt by oil leakage earlier, and Royal Dutch Shell have drawn up plans for selling their refineries in US and Western Europe.
The focus seems to be shifting towards more exploration and production rather than indulge in refining, which had become surplus in developed nations, partly due to economic sluggishness cutting down the demand.
ConocoPhilips (COP) is also having plans to divide the company into two thereby refining operations are being taken into separate entity. This would allow refining entity not eat into the profitability of exploration and productions, which is more profitable.
Another company in the sector, Marathon Oil (MRO) has already hived off its refining segment in July 2011.
Meanwhile, Exxon disclosed that the deal would allow refining and marketing to be integrated with TonenGeneral’s existing manufacturing operations. This would position them better to meet Japan’s needs in energy sector.
The deal will not prevent the Japanese company from using Exxon’s brands for marketing of ExxonMobil products in the country.
A couple of years back in 2010, the Japan Government have advised refiners to upgrade their refining plants for more fuel efficiency from crude. This is having potential to lift operations costs. Interestingly, consumption in Japan is witnessing a downside due partly to population fall and more usage of electric autos and hybrid.
Instead of spending more for the improvement of its refining plant, Exxon decided to go in for a sale of the unit, which makes sense given the weakening demand and the chances of the trend reversing looks remote in the near term.