After reading the spin off presentation on COP's website, COP is keeping the dividend at $2.64 which should support a price yielding 4.5% or better, or around +$60/share (compare to Marathon cutting their divy by 40% and the stock drops the same). P66's new dividend of $.80 should reflect a 2% yield or better, pricing it at $40/share. If true, both companies market cap would be equivalent to $80/share ($60+ 1/2 of $40).
Just looking down from 50,000 feet here (not an indepth analysis).
My first thought would be to ditch P66 and keep COP because of the high div with growth potential weighed against the low profitability of refining, but the refining outlook seems to be improving of late so not sure.
Perhaps I will have to reverse my planned strategy and instead hold PSX for dividends and sell calls against COP. Will have to wait to see their finances after the dust settles. Interesting to note my long-term very successful E&P company, Vermilion, only pays about 4% or so retaining the rest for growth.
This might not be as easy as I thought.
I agree with your thoughts on the E&P company. Something is going to have to change with them. If they keep the high dividend they are going to need to improve their growth/production rate. If they don't improve their rates then they will need to reduce the dividend. And the E&P side will have already lost the cash flow they were using from the downstream side.
I think the downstream company will be stronger than most people think and it will be the better dividend play. The petrochemical and midstream parts will strenghten it.
I think your idea of buying more of the downstream and holding the E&P is a good move.
Not a bad strategy and I intend to do pretty much the same. Refining has been a drag on the integrated oil companies due to poor crack-spreads especially in recent years and I fail to see many pluses for refining. Although the company has been investing capital in some refineries (i.e. Bayway), they've been extremely stingy on refinery maintenance and I suspect some debits will have to be taken (expense and capital) after the transition - sooner rather than later.
That said, I suspect the shedding of the refining part of the business (Phillips 66) should be a huge plus for the upstream Conoco.
As I understand it from my friends at COP, for the past several years the refining side has been providing significant cash for the E&P side. How will the E&P side do when they do not have that cash flow? They will become much more dependent on their production/reserve growth which has been poor and I think the split will expose that. Because of this I don't think the E&P price will go up as high as people assume.
Retaining that cash should help the downstream side. That combined with the chemicals and liquids businesses, should help their price.
The total overall value should (emphasize on "should") improve but I think the value split between the companies will be different than most people think.
Yeah, VLO makes $33 look more likely. I think P66 will have less debt than VLO though, better able to increase the payout - and mgmt will be under pressure to do so.
Currently, COP up to $75 seems to have the spin off priced in. Post spin off, COP may quickly appreciate back up to reflect its current yield though, once it is compared to it's peers (the goal of the spin off). Not compelling enough for me to buy more shares although I will probably hold both companies for awhile.