As I’ve talked about here and in the media all year, I have high hopes for the coming split-up of Conoco ($COP) from Phillips 66. I had clients in Marathon Oil a couple of years ago when they did the same thing (separating the downstream from the upstream assets) and the stock has worked out magnificently since. There is also a great deal of positive research on spin-offs; a portfolio consisting of parent and child from every split in the S&P from 2007 through year-end 2011 has handily beaten the S&P.
We’re long Conoco across almost all client accounts in varying amounts, it is one of our few high conviction longs.
So with that in mind, you’ll understand my delight at seeing my investment thesis laid out by one of my favorite financial writers in the game for this week’s Barron’s. Here’s Michael Santoli with his take on the coming spin-off/distribution:
INTEGRATED-ENERGY BIGGIE ConocoPhillips (ticker: COP) is spinning off its refining-and-marketing arm — the largest such business among the U.S. majors — as Phillips 66 at the end of the month. And investors should note the opportunity that will probably arise from the split.
Conoco, the integrated major least favored by Wall Street, is following Marathon Oil (MRO) in separating its so-called downstream assets (pipelines, refining, retail gasoline operations) from its core production business. The latter is low-margin but predictable, and Phillips 66 benefits from impressive scale. Conoco holders will receive one share in the new company (to be traded under the symbol PSX) for every two Conoco shares.
While “when issued” trading in the new shares won’t begin until April 12, analysts plugging in industry-average cash-flow valuations on each business figure that the combined value is around $92 or $95 per Conoco share, or more than 20% above Conoco’s latest quote of 75.36.
Following the spinoff, ConocoPhillips shares are expected to carry a dividend yield around 4%; Phillips 66, closer to 2%. The latter company will have a seasoned executive team, a good balance sheet, and an ability to make acquisitions and potentially further exploit the value of its pipeline assets.
And if you really want to do some due diligence on this idea, I’ve embedded the PDF where the company outlines its spin-off strategy and rationale: