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.
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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