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 tobear 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.
-- Nathan Slaughter
P.S. -- When ConocoPhillips splits in two, I think the stock can
really take off. It will be in an absolute sweet-spot for
investors. Why? Because it shares a trait I found in 12 of the 21
best-performing income stocks of the past decade. I can't get into
too many specifics out of fairness to my Energy & Income
readers, but you can go here to learn more.
Disclosure: Nathan Slaughter and/or StreetAuthority, LLC hold a
position in COP.