On April 4, 2012, ConocoPhillips (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 (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 revenue. Shares of both companies have performed well since that time and, today, ConocoPhillips and Phillips 66 are, respectively, the third and fifth-largest U.S. energy companies by market value.

ConocoPhillips

ConocoPhillips began in 1875 as the Continental Oil and Transportation Company. It distributed energy products in the western United States at that time. The Continental Oil and Transportation Company transformed through various mergers and acquisitions over the years and became ConocoPhillips in 2002, after the merger of Conoco Inc. and Phillips Petroleum Co.

Key Takeaways

  • Phillips 66 became separate from ConocoPhillips after a spinoff in 2012.
  • The history of ConocoPhillips dates back to 1875 when the company was Continental Oil and Transportation Company and distributed oil products in the western U.S.
  • The spinoff in 2012 separated the companies upstream E&P business, which is the core activity at ConocoPhillips, from the downstream operations of Phllips 66.
  • Splitting the two companies allowed Phillips 66 to eliminate unprofitable assets and focus on growth.
  • Phillips 66 shares have more than tripled since the 2012 spinoff and significantly outperformed ConocoPhillips, which is up a more modest 30%.

ConocoPhillips was an integrated oil and gas company before the spinoff 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 became a pure-play E&P company. The downstream business, known as Phillips 66, became an independent refining 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-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.

Meanwhile, the final separation of the two companies 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 the move would not have been possible if the two entities had remained an integrated company.

Positive Results

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, in June 2016, opened a new headquarters building in Houston, Texas.

Shares of both ConocoPhillips and Phillips 66 have advanced since the two companies parted ways, but one stock has substantially outperformed the other. From April 2012 through Oct. 2019, ConocoPhillips rose 7.5%. The company now pays a $1.22 per share annualized dividend (2.9% yield) and has a $64 billion market cap. Meanwhile, Phillips 66 shares have nearly tripled in value since the spinoff. The company pays a $3.05 per share annualized dividend (2.9% yield) and has a $52.5 billion market cap.