Conoco And Phillips 66: Sum Of Parts Now Worth Less Than Whole

Includes: COP, PSX
by: Quinn Bredl

If you like finding good deals in this wild market, just look to the recent spinoff of Phillips 66 (NYSE:PSX) from ConocoPhillips (NYSE:COP). Yes, the exploration and production guys finally got rid of that pesky refining business that was dragging them down for so long, or so they thought. The spinoff happened on May 1, and awarded the integrated ConocoPhillips shareholders with one share of PSX for every two shares of COP owned. And if you like dividends, then you'll love that COP is maintaining its current dividend, while PSX will also pay a dividend. There's no doubt that since the split, both companies have been beaten up pretty badly. Now the question is, which company is undervalued most?

As an integrated company before the split, let's give COP a fair valuation of $76 per share for a market cap of about $96 billion. That would give it a trailing price/earnings of about 8.3 (cheaper than Exxon (NYSE:XOM), but more expensive than Chevron (NYSE:CVX). Currently, just simply adding PSX's market cap to that of COP, the total value is about $87.46 billion. Some more simple math, (the difference between 87.46 and 96) and you come up with something like 8.54, meaning that the two separate companies are valued at about $8.54 billion less than when previously together. If this spinoff was supposed to "unlock shareholder value," then it's very obvious that they weren't talking about the short term. But that's even better because, as the Stones would say, "time is on my side." Step away from the short term picture and look into the distant future in which shareholder value is actually unlocked. Yes, macroeconomic issues are weighing heavily on the oil industry and the markets in general, but I'm not investing for today, or tomorrow, or the next day, or the next week, or even the next decade. So now let's take a look at the two companies respectively.

ConocoPhillips (exploration and production)

  • Market Cap: $67.75 billion
  • Current Share Price: $53.58
  • Book Value Per Share: $52.61
  • Dividend (%): $2.64 (5.1%)
  • Profit Margin: 5.25%
  • Operating Margin: 9.58%

Phillips 66 (refining and marketing)

  • Market Cap: $19.71 billion
  • Current Share Price: $31.53
  • Book Value Per Share: $39.84
  • Dividend (%): $.80 (2.7%)
  • Profit Margin: 2.59%
  • Operating Margin: 1.40%

As you can see, there are some major differences in the numbers, especially regarding margins. Conoco offers much better margins, while also boasting a fat 5% yield. Phillips is working with razor thin margins, and in the volatile refining business that can be a dangerous thing; but let's not neglect the fact that Phillips isn't only a refiner. The midstream and chemical businesses can be quite profitable and are much less volatile than refining, which should offset volatility to some extent. Management also seems to be shareholder friendly as they've announced plans for stock repurchases and an annual increase in the dividend, not to say that Conoco management isn't shareholder friendly.

In regards to growth, Phillips should have more upside due to its interest in non refining businesses. Many investors mark Phillips as a refiner, a reason for its deeply discounted share price; but as many will see, it is much more than just an Average Joe.

While both companies are undervalued, I feel that Phillips is cheaper based on growth potential, while also paying a modest dividend. But if you're a yield hunter, Conoco may just be the right stock for you. Regardless of which company you prefer, with all of this monkey business at home and abroad, you may want to wait for a better buying opportunity to occur. On one hand, it's very well possible that the market heads lower for the summer. On the other hand, the market could rally to a point of no return, all depending on a few headlines in the news.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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