On April 4, 2012, ConocoPhillips (NYSE: COP) announced the board of director's approval for the decision to spin off the downstream business into a separate company known as Phillips 66 (NYSE: PSX). Before the split, ConocoPhillips was the third-largest oil company in America, with 29,800 employees, approximately $153 billion in assets, and $245 billion in revenues in December 2011.

ConocoPhillips

ConocoPhillips began in 1875 as the Continental Oil and Transportation Company, and distributed energy consumables to the western United States. Over the years, the Continental Oil and Transportation Company transformed through various mergers and acquisitions to become ConocoPhillips in 2002, after the merger of Conoco Inc. and Phillips Petroleum Co. This made it the fifth-largest oil company in the world.

ConocoPhillips was an integrated oil and gas company and, while business operations were divided between upstream and downstream operations, this caused an imbalance with a capital distribution that had a negative effect on growth opportunities. Imbalance in resource and capital allocation is common for integrated oil and gas companies, as the exploration and production (E&P) section is the priority for capital distribution. However, for ConocoPhillips, this meant the liquidation of assets from the downstream in order to provide for the upstream.

The Spinoff

Citing the desire to focus on value creation for shareholders, ConocoPhillips announced the decision to split the company between upstream and downstream operations in 2011. The upstream business retained the name ConocoPhillips and is a pure-play E&P company. The downstream business, known as Phillips 66, became an independent refining company.

Phillips 66

The final separation of Phillips 66 from ConocoPhillips in 2012 allowed Phillips 66 to explore growth opportunities across the value chain and eliminate unprofitable assets. The decision for Phillips 66 to reduce refining operations and focus investments into chemicals and midstream represented a major shift, as this move would not have been possible if ConocoPhillips/Phillips 66 had remained an integrated company.

Businesses compete for resource allocations in an integrated company, with the majority going toward the E&P sector. The E&P sector is the business that has a high risk/high return rate, as it is focused on discovering new sources of oil and gas, which in turn feeds the refining and purifying sector. Focusing more capital to downstream operations at the expense of the upstream was not in the best interest of ConocoPhillips.

Positive Returns

In November 2014, two years after the split, oil prices went from $100 dollars a barrel to less than $30 a barrel by February 2015. While many companies in the oil and gas industry saw lagging profits, ConocoPhillips and Phillips 66 were not as negatively affected. In the months leading up to the spinoff, both sides of the business began to shed unprofitable assets and focus instead on areas with the greatest potential for growth. This elimination continues to evolve as the environment changes.

For example, in 2015, after realizing that non-core North American natural gas assets and deepwater exploration were not expanding at a profitable pace, ConocoPhillips took steps to remove capital and transition into other areas.

Both companies have reported positive returns since the split. As of March 31, 2016, ConocoPhillips and Phillips 66 reported market capitalization of $54.24 billion and $40.15 billion, respectively. ConocoPhillips reports an ROE of 15.92%, which is higher than the independent oil and gas industry ROE of 0%, indicating that ConocoPhillips is running more efficiently than the industry standard. Phillips 66 reports an ROE of 15.92%, which is close to the oil, gas, refining & marketing industry ROE of 16.7%, indicating that Phillips 66 is operating in line with other companies in the industry.

ConocoPhillips remains focused on E&P and has continued to work toward eliminating overhead costs. Phillips 66 has forged ahead with investing in the development of midstream businesses and opened a new headquarters building in Houston, Texas in June 2016.