On Friday, Warren Buffett let it be known on Bloomberg that Berkshire Hathaway Inc. (BRK.A) had sold shares in ConocoPhillips (COP) in favor of Phillips 66 (PSX). Okay, it was actually one of his deputy stock pickers that made the move, but in essence it still has his support.
This move is interesting considering the recent split from ConocoPhillips and the announcement that Phillips 66 would have less than half the dividend yield of its big brother. The $.20 quarterly dividend will only amount to a 2.2% yield.
Maybe this shouldn't be a huge surprise as Buffett has long avoided paying dividends at Berkshire. The market though loves dividend paying stocks, and ConocoPhillips has one of the juiciest yields at nearly 5%.
Refining Remains Tough
Phillips 66 is now considered the largest U.S. independent refiner by market value, though the company plans to focus on moving more into pipelines and chemicals. Refining is a tough business in the U.S. with numerous regulations and cheap foreign competition. The company will become a lot more attractive as it moves to diversify into the new sectors.
ConocoPhillips on the other hand is a leading explorer and producer of crude oil and natural gas. The company has a worldwide operation that can take advantage of the higher oil and natural gas prices outside the U.S.
The companies will report Q2 2012 earnings later this month. These reports will better establish the financials and individual worth of each stock. Until then, the market favors sticking with the higher yielding stock. No reason exists to make a similar move as Buffett.
Remember these initial reports as split stocks can be as confusing as enlightening. Though it should be predictable, the separation of the business lines isn't always as straightforward as one thinks. Not to mention that new management teams presenting on conference calls always provides a higher level of risk.
Historically, spin-offs can make great investment opportunities as the new independent company gets more focus from management. Once outside the big brother, the company is able to make appropriate investments and can flourish. In this case, the goal was to remove the refining business from the more profitable exploration company.
During the middle of last year, Marathon Oil Corporation (MRO) split into two companies with the refining business being renamed Marathon Petroleum Corp. (MPC). This split is similar to the move by ConocoPhillips. As the figure below shows, the refining stock has had better results in the last year, so maybe Buffett is on to something.
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Some of the recent benefits of being a refiner, or especially in the chemical business, is the extremely low natural gas prices domestically. This cheap feedstock for the chemicals business provides a cost advantage.
Like refining, natural gas will eventually become a world market where prices will push towards those outside the U.S. The exploration business of ConocoPhillips will benefit from the global market, and the chemical and refining businesses of Phillips 66 will be hurt by stiff regulations in the U.S. and less stringent outside.
Considering the pick was made by Buffett's stock picker and not him, it gives me more comfort to pick against him and go for the higher yielding stock. Phillips 66 needs to step up and return more money to shareholders to make that the stock choice.
Additional disclosure: Please consult a financial advisor before making any investment decisions.