ConocoPhillips will spin off its refining arm in a bet that each operation will be worth more as separate companies, abandoning the bigger-is-better strategy that had driven oil giants into mergers over the past 15 years.

Shares of ConocoPhillips, the third-largest U.S. oil company, rose as much as 7.5 percent on the news.

The split will create the largest refining company in the United States based on capacity and the largest exploration and production company by far based on oil and gas reserves.

With the move, ConocoPhillips becomes the first of the so-called super majors to shift away from the strategy that led the industry to consolidate into a handful of players with global reach in the oil and gas production and oil products businesses.

ConocoPhillips' move comes just two weeks after smaller peer Marathon Oil Co finalized the spinoff of its refining arm into Marathon Petroleum Corp , and analysts said it could help close a valuation gap with other energy companies.

We believe more value is created in the formation of two very clear stand-alone companies, Chief Executive Jim Mulva told analysts on a conference call.

Two separate companies will allow their management teams to focus more intently on running their businesses, as well as allow investors a choice, Mulva said.

Mulva built this company in a different commodity price environment and different outlook, said Barrow, Hanley, Mewhinney & Strauss Inc analyst and portfolio manager R. Lewis Ropp, and now we have an opportunity to separate back and really get peer group multiples that are much higher than the integrated multiples investors are assigning to the company.

The split should unlock value in the exploration and production business, which is very undervalued, said Ropp, who is a long-time owner of ConocoPhillips shares.

The announcement marks an abrupt change in the company's views on a spin-off of its refining business. In March, Mulva was asked at an analysts' meeting if he would consider a split as Marathon had done.

He said in March: I think for them, they've decided it seems to make sense and work for them. Whether that's something that we should do, I don't think so.

Mulva told analysts on Thursday that the company began taking a hard look at options for its refining business last fall.

GAME PLAN

Over the past two years, ConocoPhillips has embarked on a massive portfolio shift to sell up to $17 billion in assets and reduce its debt load, while aggressively buying back shares and increasing its dividend.

The plan to return cash to shareholders will continue at both companies. The exploration company will contemplate share repurchases in 2012, when the split is expected to be complete, while both companies will pay a dividend, Mulva said.

Strategies at both companies will remain the same, the executive told analysts.

ConocoPhillips' exploration business will continue to shed mature oil and gas properties while looking to increase production and reserves that deliver good returns. The company's refining arm will sell, shut or joint-venture refineries that are unable to process cheaper grades of crude oil, Mulva said.

But Benchmark Co analyst Mark Gilman said ConocoPhillips would lose flexibility in the allocation of capital.

I'm not a fan of these financial engineering maneuvers, Gilman said. I don't see any incremental value associated with two separate companies.

ConocoPhillips is the smallest of a peer group that includes Exxon Mobil Corp , Royal Dutch Shell , Chevron , BP Plc and Total SA .

Raymond James analyst Stacey Hudson estimates ConocoPhillips' two companies would have a combined value of $80 to $85 a share, or $113 billion to $120 billion.

The refining business would probably be worth around a quarter of that, Hudson said, although ConocoPhillips' decision about where to place its pipelines and storage operation and chemical business could have an effect on the final value.

Conoco's 2002 purchase of rival Phillips was among the last of the megamergers that began in 1998 when BP bought Amoco.

SPLIT IN 2012

Houston-based ConocoPhillips said it expected to complete the separation in the first half of 2012.

Management teams for the two companies will be determined later this year, and Mulva plans to retire when the transaction is complete.

Willie Chiang, who currently runs the company's refining arm, is a likely candidate for the CEO job in that unit. Alan Hirshberg, a recent hire from Exxon Mobil Corp , and Greg Garland, the former CEO of Conoco's chemical business, are both seen as strong candidates to replace Mulva, Benchmark's Gilman said.

The decision to split comes amid rising confidence that global oil prices will remain strong for years to come as rising demand from China, India and other emerging markets soaks up supplies.

Benchmark Brent crude oil prices averaged $117 a barrel in the second quarter, and forward prices show the market currently expects prices of about $106 by the end of the decade.

Conoco's oil and gas production fell more than 5 percent last year to 1.8 million barrels of oil equivalent per day, but that business still provided more than 80 percent of the company's 2010 net profit.

Work on the separation, which the company said it began planning in earnest last fall, will begin immediately. ConocoPhillips said the transaction does not need a shareholder vote.

The spinoff is subject to market conditions, regulatory approvals and the receipt of a U.S. Internal Revenue Service ruling that approves its planned tax-free status.

The company has not yet decided what to do with its 50 percent stake in Chevron Phillips Chemical Co LLC, a joint venture with Chevron Corp . The venture, which makes plastics, brought in the smallest portion of ConocoPhillips' 2010 income -- $498 million.

Shares of ConocoPhillips were up 1.9 percent at $75.80 on Thursday afternoon, off an earlier high at $80.00.

(Additional reporting by Michael Erman, Ernest Scheyder and Roy Strom in New York, Braden Reddall in San Francisco and Krishna N Das in Bangalore; Editing by Maju Samuel, Lisa Von Ahn and Matthew Lewis)

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