I love chatting with my subscribers. It's one of my favorite parts of being chief investment strategist of my new newsletter, Energy & Income. That's why I try to address as many questions that subscribers send as possible.
Now, I can't get to every single email that makes it to my inbox. But I do take a little time each month to share some of the best questions -- and my answers -- with subscribers about how to profit from the world's most important industry -- energy.
It's important to me that my readers know that I'm in their corner. It's also one of the reasons why Energy & Income uses "real money" portfolios -- I actually buy and sell each holding in a real brokerage account, which StreetAuthority funded with $100,000. And subscribers not only are able to mirror my performance, but they sometimes even beat it, because I always give 48 hours advance notice before I buy anything, and I'll always tell subscribers exactly when to sell.
So when one of my readers sent a question about one of the oil majors, I just had to share it. And now that I've given my take to subscribers (and put my money where my mouth is by buying into the stock), I'll share it with you...
"If an investor buys ConocoPhillips (NYSE: COP) before it splits into two companies, will he or she then own two stocks, both providing dividend income?"
-- Nicholas, F. Deer Park, Texas
For those who may have missed my answer, I mentioned that ConocoPhillips plans to split the exploration and production (E&P) and refining and marketing segments into two standalone public companies. (Every two shares of COP will get you one share in the new Phillips 66.)
This reorganization makes sense for many tactical reasons. For one, the refining business is cyclical and capital intensive. So financial resources that used to be drained can now be fully brought to on increasing oil and gas reserves.
Putting billions to work...
ConocoPhillips has been deliberately streamlining, divesting large chunks of noncore assets to lose some balance-sheet girth. The company has pocketed $15.4 billion in sales proceeds during the past couple of years, most notably from unwinding a 20% stake in Russia's Lukoil.
That cash windfall paved the way for a 20% dividend hike last February and a sizeable $10 billion stock buyback authorization. Now, management has made the decision to split the exploration and production (E&P) and refining and marketing segments into two standalone public companies.
After the split, Conoco will become the nation's largest pure-play E&P company. The company's operations already span 17 countries around the globe, and its wells bring 1.5 million barrels of oil to the surface each and every day -- with 8.5 billion waiting in reserve.
Shareholders will also have plenty to look forward to in the years ahead. Conoco has exploration projects underway from Bangladesh to the Barents Sea and 53 million acres filled with future drilling targets.
In fact, within hours of my initial answer to Nicholas' question, the company unveiled some aggressive investments on the horizon.
Conoco plans to spend $15.5 billion in capital expenditures for the upcoming year, a 15% increase from the $13.5 billion that was put to work this year. About $1.2 billion of next year's outlays will be spent on maintenance to keep refineries running smoothly. But the remaining 90% will be dedicated to growth projects to help stimulate oil & gas production.
Much of that will be invested overseas, most notably on a major liquefied natural gas (LNG) venture in Australia. But the lion's share will stay in North America, where the company is taking aim on high-return shale plays such as the Bakken and Eagle Ford formations. As these upstream investments take root, Conoco's oil production in the lower 48 states alone is expected to rise by 50% (from 400,000 barrels a day to 600,000) through 2015 -- at higher margins per barrel.
ConocoPhillips has also repurchased 155 million shares this year and retired more than 15% of its total outstanding shares since 2010. Now, thanks to increased production and continued sales of noncore assets, management is promising to fund another $10 billion in repurchases during the next couple years, which could take as much as 10% of shares outstanding off the market.
The other side of the spin-off
Phillips 66 won't be left empty-handed, either. The new organization will retain control of everything else, a valuable collection of midstream, downstream and chemicals businesses. The company will have refining capacity of 2.2 million barrels per day and affiliations with 7,500 branded retail outlets.
Phillips 66 shareholders will also get a 50% stake in DCP Midstream Partners (NYSE: DPM), which holds the keys to 60 gas processing plants and 62,000 miles of gathering and transmission pipeline. And they'll get the Chevron Phillips Chemicals joint venture (which posted near-record profits of $197 million last quarter).
What to expect
Another thing to keep in mind about this split: the market also often assigns higher valuations to transparent, uncluttered business models.
I wouldn't expect to see a miraculous doubling of the dividend after the company splits in two, though. If its combined operations are currently generating enough cash to comfortably support a $0.66 per share dividend each quarter, then giving part of the company a new corporate address won't change that.
Conoco is planning to maintain its $2.64 per share annual payout -- and Phillips 66 is expected to throw off another $0.80 per share. For those who invest today, this points to a yield north of 5.0% on COP and a blended 4.2% income stream on your investment.
Action to Take--> I expect profits (and dividend distributions) to soon stretch much further on a per-share basis once the ConocoPhillips is split in two. Keep in mind, this company has outperformed the integrated oil/gas sector during the past one-, three-, five- and 10-year time frames. And it has attracted the interest of none other than Warren Buffett (Berkshire Hathaway holds about 29 million shares).
With all this in mind, I added ConocoPhillips to one of my Energy & Income portfolios on Dec. 7. (And as usual, I gave my subscribers a two-day advance notice.) The split isn't expected to be completed until the summer of 2012, but I wanted to get in ahead of time, because I think the sum of the parts is worth about $90 -- almost 30% above where the stock is now.