Phillips 66: This Energy Spin-Off Will Reward Patient Investors

| About: Phillips 66 (PSX)

Phillips 66 (NYSE:PSX) was recently spun off from Conoco Phillips (NYSE:COP). As with most spinoffs in this space, it was sold heavily by investors that only wanted the E&P business that COP represents. It also started with little analyst coverage. This is starting to change and the stock looks undervalued for patient investors.

Key analysts calls and activity for PSX:

  • Howard Weil just initiated the shares as an "outperform" and slapped a $38 price target on the stock.
  • Option action in the Jan 2013 35 call contracts were heavy after the split for PSX.
  • Credit Suisse analyst Edward Westlake last week began coverage of the company with an "outperform" rating and a $42 price target.
  • SI Group analyst Doug Terreson rates Phillips a "buy" with a $44 price target.

4 reasons PSX is a bargain at just over $31 a share:

  • The company has a forward PE of under 7, a discount to peer Valero (NYSE:VLO) which is just under 8 times forward earnings.
  • In addition to refining, it has assets in the midstream business and has joint ventures in chemicals. This should diversify its earnings streams and cause it to be slightly less volatile than pure refiners. Non-refining earnings represent 40% of total earnings.
  • After the spinoff, the company has a more focused management and spinoffs tend to do better than the overall market over the long term.
  • 7 analysts now cover the stock (expect that to grow) and they have a median price target on Phillips of $40 a share, roughly 30% above the current stock price.

Disclosure: I am long COP, PSX.