Last week ConocoPhillips (COP) spun off the company's refining, marketing, chemical and midstream businesses into a new company, Phillips 66 (PSX). Phillips 66 is out-the-gate with a $20 billion market cap and I was interested in finding some metrics to compare this valuation with what seems to be the primary competition, Valero Energy (VLO).
Valero is pretty close to a pure play refining and marketing company. Assets include 16 crude oil refineries and 10 ethanol plants. Valero's refining capacity is 3 million barrels of crude oil per day. The company lists 6,800 wholesale and retail marketing locations for its products. Phillips 66 owns 15 oil refineries with a refining capacity of 2.2 million barrels per day. Phillips 66 refined petroleum products are sold at 10,000 outlets in North America and Europe. The refining and marketing assets of Valero and Phillips 66 are very similar. Phillips 66 has additional business lines and assets in chemical manufacturing and natural gas midstream production and transport.
Valero generated operating income of $3.68 billion in 2011 and has a current market capitalization of $11.9 billion. In a pre-spinoff investor presentation, Phillips 66 listed 2011 adjusted refining and marketing earnings of $2.66 billion. Chemical and midstream earnings equaled $1.1 billion, corporate expenses sucked up $200 million, leaving Phillips 66 with total adjusted earnings in 2011 of $3.59 billion - slightly lower than Valero's results. Phillips 66 has a current market cap of $19.7 billion - a 65% premium to Valero's market value.
Profits from the crude oil refining business are very volatile. Both companies did significantly better - double operating earnings - in 2011 than in 2010. Investors may place a higher valuation on the Phillips 66 chemical and midstream business, although those two segments also reported significantly lower earnings in 2010 compared to 2011. It appears that Phillips 66 has a much higher market valuation than Valero without producing any additional levels of profit.
Phillips 66 has announced an initial quarterly dividend rate of 20 cents per share, putting the current yield at 2.5%. The yield on Valero is 2.8%. Without the benefit of some actual earnings results it is difficult to get an accurate handle on the actual profits of Phillips 66. The Wall Street consensus estimate is $4.97 earnings per share for 2012, compared to an estimate of $3.70 for Valero. As is typical with energy companies, the spread between the high and low estimates is about $2.00 for each company.
From this initial look at the Phillips 66 expectations, the current share price appears to be about 25% over-valued - or Valero is undervalued. A pairs trade of buying Valero long and selling Phillips 66 short is a relatively low-risk way to profit if the market brings the value of the two biggest refining companies closer together.