58% Gain For This Energy Stock
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Since the May 1, 2012 spin-off, the two component parts of the formerly-integrated ConocoPhillips (NYSE: COP) have taken somewhat divergent paths. Whereas the spun-off downstream retailer known as Phillips 66 (NYSE: PSX) has enjoyed market-beating returns over the past three quarters, the upstream producer that retains the ConocoPhillips name has enjoyed mediocre returns. These contrasting fortunes are indicative of specific challenges faced by ConocoPhillips as well as a successful unlocking of the long-dormant value in the core businesses of Phillips 66.
During the spin-off, ConocoPhillips distributed shares of the newly-created Phillips 66 stock to ConocoPhillips shareholders of record as of the close of trading on April 16, 2012. Each shareholder received one new Phillips 66 share for every two ConocoPhillips shares that they held. Any remaining fractional shares were combined and sold on the open market for cash consideration.
On the day of the spin-off, ConocoPhillips closed at $56.51 per share. It has since risen in value to touch $59.17 per share as of January 7, 2013. This represents a return of about 4.7 percent during an eight-month period. Meanwhile, Phillips 66 closed at $32.76 per share on May 1, 2012. During the subsequent eight months, it has nearly doubled in value. On January 7, 2013, it closed at $51.36 per share after touching an all-time high above $55 during the previous week. Shareholders who have held this stock since its inception have earned returns of nearly 58 percent.
Before the Phillips 66 spin-off, Houston-based ConocoPhillips was one of the United State's largest integrated oil companies. After the spin-off, it remains a formidable competitor within the exploration and production space. It owns exploration and development assets in North America, Australasia and Eurasia, including several promising oil sands and shale properties. In recent years, it has attempted to hedge against the falling price of natural gas with pure-oil plays in North America and elsewhere.
With over 10,000 retail gasoline outlets and an oil refining capacity of more than 2 million barrels per day, Houston-based Phillips 66 is one of North America's largest independent downstream outfits. Through a joint venture, the company profits from a natural gas and natural gas liquids refining operation that is currently capable of processing over 7 billion cubic feet per day. It operates over a dozen refineries and several marine terminals. Phillips 66 employs 12,500 full-time employees and thousands more part-time employees at its retail outlets.
By creating a standalone refining giant, the Phillips 66 spin-off may benefit several smaller oil-services companies. The company recently signed a sizable distribution agreement with Waltham, Massachusetts-based transportation and materials outfit Global Partners (NYSE: GLP). The terms of the deal involve transporting the North Dakotan shale oil and gas that Phillips 66's legacy assets continue to produce to the company's New Jersey gasoline refinery via a rail network that Global Partners has cobbled together.
Although Global Partners employs just 260 full-time employees, it is not a small company: In 2011, the company took in $16.6 billion in gross revenues. However, its profit margins are meager. As such, it looks to benefit handsomely from a long-term contract that gives it a stake in one of North America's fastest-growing oil patches.
Meanwhile, Phillips 66's growth may threaten downstream producers and retailers like San Antonio-based Valero (NYSE: VLO). Although Valero has a superior oil refining capacity north of 3 million barrels per day, Phillips 66 operates 3,500 more retail outlets across a wider swathe of the United States. In addition, Phillips 66 has a greater amount of exposure to the natural gas market. If the price of natural gas rises considerably during the coming years, Valero could be at a serious disadvantage relative to its new competitor.
Even if the price of natural gas doesn't rise considerably in the short term, Phillips 66 looks poised to take advantage of a secular uptick in the energy markets. As the North American economy slowly gathers steam, it appears likely that retail demand for gasoline will increase by several percentage points during each of the next several years. While the United States's new CAFE rules will dampen long-term demand for retail gasoline, the full effects of these regulations may not be felt for a decade or longer. In the meantime, Phillips 66 is in an enviable position among its downstream competitors.
2012 was not a particularly memorable year for the global energy markets. However, investors who held stock in ConocoPhillips during the early part of the year are sure to remember it as a profitable period for their energy portfolios. As one of the best-performing energy stocks of 2012, the spun-off Phillips 66 has made believers out of a number of skeptical investors. With some analysts setting 12-month price targets as high as $80 per share for the company, Phillips 66 may yet have more room to run.
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