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Smart Farming in the Energy Patch

05/21/2012 8:15 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

This diversified energy company is one of the most forward thinking in the industry, and its recent spinoff will be a deal that the other majors will certainly take into consideration in coming years, writes Kelley Wright of Investment Quality Trends.

A Select Blue Chip with change on the horizon is ConocoPhillips (COP).

After the market close on April 30, shareholders of record as of April 16 will receive a special dividend comprised of one share of Phillips 66 (PSX) for every two shares of ConocoPhillips. Approximately $6 billion in cash will be transferred to COP, the majority of which is slated for COP debt reduction.

On May 1, COP went ex-dividend and PSX traded the regular way. COP will continue to follow its normal dividend schedule (March, June, September, and December), and the first dividend for PSX is expected during the third quarter of 2012. Shareholders should expect some volatility as the market adjusts to the distribution and fleshes out the ramifications to each company's earnings prospects.

The primary purpose of the distribution is to "unlock and enhance shareholder value." This is one of those often-used Wall Street terms that can be open-ended and somewhat nebulous. The company has attempted to define its objectives however in a presentation that can be found here.

Much of the presentation is graphs and accounting tables, which you may not want to slog through. The highlights in my opinion are as follows: The new ConocoPhillips will be a pure-play on oil and gas exploration, will be financially strong, and will focus on cash-flow growth and strong shareholder distributions.

The company projects its initial dividend yield will be in excess of 4%, and will complete a $5 billion share repurchase by June. The company intends to sell a total of $10 billion in assets during 2012, after which they will determine the timing and amount of additional share repurchases.

Phillips 66 will have three primary areas of operation: Refining & Marketing (R&M); Midstream; and Chemicals. The R&M segment will consist of 15 refineries with 2.2 million barrels per day of refining capacity, and a transportation network of 15,000 miles of pipeline and 57 terminals.

The Midstream segment will be the largest gas gatherer and processor in the US, will be the largest NGL (natural gas liquids) producer in the US, will have 61 plants and 12 fractionators, and will have 62,000 miles of pipeline. Finally, the Chemical segment is a 50/50 joint venture with Chevron (CVX) called CP Chem, and is North America's largest producer of high-density polyethylene and the fourth-largest North American producer of ethylene.

The initial annual dividend for Phillips 66 is projected at 80 cents per share. Without a standalone history of uninterrupted dividend payments for 25 years, however, IQ Trends lacks sufficient data to identify a historical profile of dividend yield boundaries. As such, it would be inconsistent with our history and methods to include Phillips 66 in our roster of Select Blue Chips.

Although each company has its own profile of value, it is not uncommon to observe a similarity in dividend-yield boundaries among companies within an industry. Select Blue Chip Murphy Oil Corp (MUR) in the Rising Trends category occupies the refining and marketing space in the oil and gas industry, and has a dividend yield profile of 2.4% at Undervalue and 0.8% at Overvalue.

With a projected initial annual dividend of 80 cents per share for PSX, the dividend yield on the when issued shares calculates currently to 2.34%, within the dividend yield range of MUR.

If Phillips 66 is successful in its endeavors, it would not be farfetched to believe that their profile of value will develop similarly to other companies within that industry.

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