Effects of the Upcoming ConocoPhillips and Phillips 66 Split
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ConocoPhillips (NYSE: COP) announced that its first quarter earnings fell three percent to $2.9 billion, or $2.27 per share, on Monday. On Tuesday, shares of the company entered into oversold territory, trading as low as $71.82 per share.
ConocoPhillips is the third largest oil company in the United States, but it is undergoing some major changes, including splitting into two smaller companies on May 1. One company will keep the ConocoPhillips name and focus on exploration and production. And the other will become Phillips 66, and focus on refineries and pipelines.
The company reported that the first-quarter profit dropped due to a decline in production following the sale of billions of dollars of oil fields and other assets. Unlike other major oil companies, ConocoPhillips has been selling off its oil fields. Overall, the company has sold over $20 billion in assets and investments since 2010. In 2010-2011, the asset divestiture program yielded $10.7 billion. The first quarter earnings included gains from the asset sales of $987 million, much of which came from the Vietnam business unit sale. Fewer assets and oil fields, means lower production and income. The company intends to reduce assets by another $8-10 billion over the next year.
Lower production and fewer oil fields meant ConocoPhillips' refineries also sold less gasoline, diesel and other petroleum products in the quarter. Total refining sales dropped by 11.2 percent. Its midstream business, which includes pipelines, increased profits 27.4 percent, and its chemicals business boosted profits by 13 percent.
CEO James Mulva will retire from the company after the split. He will be replaced by Ryan Lance, currently the senior vice president, Exploration & Production – International of ConocoPhillips. Greg Garland, will become the Chairman and CEO of Phillips 66. He is currently the senior vice president, Exploration and Production, Americas, of the company.
Phillips 66 common stock will be traded on the New York Stock Exchange under the symbol PSX. ConocoPhillips shareholders will receive one share of Phillips 66 common stock for every two shares of ConocoPhillips common stock held at the close of business as of April 16, 2012.
ConocoPhillips will continue to pay out a respectable dividend. Lance said in a statement, “We will offer a secure, sector-leading dividend, 3 to 5 percent annual production growth, 3 to 5 percent annual margin improvement and a continued focus on returns.” ConocoPhillips paid a quarterly dividend of 66 cents in mid-February.
The former Marathon Oil Company (NYSE: MRO) is a model to look to for recent oil companies who have made similar splits. Marathon Petroleum Company (NYSE: MPC) now exists as an independent downstream oil company, with focus on refining, pipeline, and marketing. Marathon Oil Company is a completely independent and separate oil and natural gas exploration company. The split was completed on July 1, 2011.
Marathon Petroleum is the fifth largest U.S. refiner with a combined crude oil processing capacity of approximately 1,193,000 barrels per day. Since the split of the two companies, both have done well independently. Marathon Petroleum boasts strong financial health, with over $3 billion cash on hand. The company also offers a 2.5% dividend.
Traditionally, BP, Chevron, ConocoPhillips, ExxonMobil, and Royal Dutch Shell have been dubbed the “Big Five Oil Companies” by the media and critics. The “Big Five” has no true definition- is it the biggest five oil companies in revenue? Reserve barrels? Refinery production? Stock? Market cap? It is not known. Nor is it a really accurate label for any particular category, except maybe that of the five most well-known names in oil and gas, which is a label many companies would welcome. As ConocoPhillips departs the lineup, it may be Marathon, Valero Energy, or Sunoco who will fill that spot. (Although, as noted above, it is already Marathon Petroleum who is the fifth largest US refiner.)
After the split ConocoPhillips will compete with such companies as Anadarko Petroleum, Devon Petroleum, and Chesapeake Energy in North America as an E&P only corporation. Phillips 66 will continue to be in the same markets as before, but as a much smaller company.
ErinAnnie has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.