ConocoPhillips Worth $80: Downstream Spinoff Will Focus On Chemicals, Transport

COP: ConocoPhillips logo

Oil major ConocoPhillips (NYSE:COP) will spin off its refining, transport and chemicals business into a separate entity on May 1st. [1] The newly formed company will be called Phillips 66 – after the company’s popular retail brand and will focus on the growing pipeline and chemicals business. Phillips 66 will look to curtail its involvement in the refining business because of challenging conditions in the industry. Other vertically integrated oil majors such as BP (NYSE:BP) are also looking to cut exposure to the cyclic refining business to focus on upstream activities.

We have a near $80 price estimate for ConocoPhillips, which is at a 10% premium to the current market price.

Click here for our full analysis of ConocoPhillips.

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Shift in focus to higher margin mix

ConocoPhillips has been actively pursuing the sale of its refining assets in the U.S. after its downstream margins took a hit last year because of high crude oil prices and lower end-demand from customers. [1] Last year, the company announced that it would be spinning off its downstream and transportation business to focus on upstream exploration and production activities, which are generating higher rates of return. The refining, transportation and retail arm, which will now operate under Phillips 66, will also focus on high growth sectors such as chemicals and pipelines. Investments for the two streams will double (as a percent of total capital outlay) by 2015.

Phillips 66 will also look to reduce its exposure to the refining business. Refining margins have been hit by high crude prices and weak retail demand in the U.S. Gasoline demand in the U.S. in March fell by 5% compared to the same month last year because of high fuel prices. [1]

East coast refineries have been hit particularly hard due to their reliance on sweet crude imported from Europe and Africa. Prices of light crude such as Brent have been trading at a significant premium over the past few quarters, hurting these refineries further. The above chart gives a break-up of our price estimate for the company.

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  1. Phillips 66 Looks to Pipes to Blunt Refining Volatility, Bloomberg [] [] []