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Conoco Receives Spin-Off Approval

Zacks Equity Research

ConocoPhillips (COP) won the approval from its board of directors to split its refinery arm, Phillips 66, in a move to further accelerate the value of both entities.

In July last year, the third biggest U.S. integrated oil company, following ExxonMobil Corporation (XOM) and Chevron Corporation (CVX), planned to separate its upstream oil and gas exploration and production unit from its downstream refining division into two stand-alone, publicly traded corporations. The move is expected to create the largest refining company in the U.S. (with a capacity of 2.4 million barrels per day) and the largest exploration and production (E&P) player based on oil and gas reserves.

Following the closure of market on April 30, 2012, the groups – with headquarters in Houston − will be alienated through a tax-free distribution of Phillips 66 shares to ConocoPhillips common stock holders. The shareholders of the E&P arm will receive one share of Phillips 66 common stock for every two shares of ConocoPhillips stock held at the close of business on April 16. The refinery unit will trade on the New York Stock Exchange under the symbol PSX. Prior to the distribution, Phillips 66 shares will trade under the symbol PSX WI in a "when-issued" public market.

The strategies at both companies to return cash to shareholders will remain unchanged. Over the past two years, ConocoPhillips has been in a restructuring program to sell up to $17 billion in assets and reduce its debt load, simultaneously buying back shares and increasing its dividend.

We remain positive on the outlook for the new ConocoPhillips post-split, as it holds the promise of unlocking significant value. The idea behind the spin-off is to create value for shareholders who like the volatility in the refining business.

The creation of two separate groups is also believed to be beneficiary since the two separate entities will get to pursue greater opportunities in their respective market segments without the constraints of the parent company. It will also better serve the needs of both investor groups. We expect this move to allow ConocoPhillips to narrow the return gap, which historically lags its peers.

We see ConocoPhillips shares performing in line with the broader market considering its sensitivity to changes in the crude oil price, as well as geopolitical risks associated with international operations and operational challenges. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

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