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Stock Strategist Industry Reports

ConocoPhillips and Phillips 66 Stand Apart From Peers

The newly independent firms have enticing dividend yields, but upside potential for their share prices is questionable.

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 ConocoPhillips (COP) began trading as an independent exploration and production firm on May 1, after completing the spin-off of its downstream assets into a new company,  Phillips 66 (PSX). Considering that this is the first split of a major integrated energy company, finding comparable companies proves difficult. While its growth prospects are less appealing relative to other independent E&Ps given its size, ConocoPhillips offers a juicy dividend not available from its peers. Share repurchases using proceeds from asset sales could further boost shareholder returns. Phillips 66 remains primarily a refiner, but also holds interests in chemical and midstream assets, which boast higher returns, add earnings stability, and differentiate the company from its peers. It also pays a relatively generous dividend and holds the potential for share repurchases.

However, each firm has its downsides. ConocoPhillips' low growth rate and diversified asset base result in a valuation discount relative to its new peer group. Phillips 66's near-term prospects remain tied to refining profits, which are notoriously volatile and remain at potentially cyclical highs, holding the possibility of a return to midcycle levels. As a result, we think there is little upside for either company's shares, but each could prove compelling to those looking for yield in an E&P or a refiner.

Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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