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ConocoPhillips Shows Bigger Isn't Better, as Big Oil, Exxon Lag

The move may be a welcome relief after high oil prices have done little to improve the sector's stock performance. The company's shares are off over 1% year-to-date, underperforming a 10% gain for the Standard & Poor's 500 Index. In the past 12 months, the stocks of ConocoPhillips, ExxonMobil and Chevron have all shed ground, while the S&P has gained over 3%, recovering from a second half lull.

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After the split, ConocoPhillips will be the largest independent exploration and production company in the U.S., with 56% of its 1.6 million barrels of oil equivalent a day in liquids and more than half of its oil and gas coming from North America. That oil and gas portfolio includes large Eagle Ford, Permian and Bakken liquids-rich shale assets and a significant stake in Canadian oil sands projects like Foster Creek-Christina Lake. Internationally, the company also has liquid natural gas production assets in Australia, oil investments in the North Sea and deepwater oil wells offshore of Malaysia.

After the split, ConocoPhillips is expected to have a market cap of $69 billion -- roughly the size of Occidental Petroleum (OXY) -- but it will possess double the oil and gas reserves, notes Gheit of Oppenheimer, who highlights the company's projected 4.9% dividend yield, $5 billion in first-half 2012 share repurchases and balance sheet leverage.

Meanwhile, the company's stated plan to divest slow-growing assets, a potential successful multi-billion arbitration claim on its seized Venezuelan energy assets and the lower valuation given to its oil reserves could be an added catalyst, in coming years, adds Gheit.

Phil Weiss, Argus Research analyst, said in a recent report, "COP is presenting itself as a new class of investment, largely due to its plans to provide sector-leading distributions and annual margin improvement, while also growing production at a more measured pace than peers. We reiterate our view that the upcoming spinoff will help to further unlock the shares underlying value."

The spun off refining and chemicals division Phillips 66 may also prove to be a winning oil-sector play. "[The company] will have substantial interests in the Chemicals and Midstream businesses, which are higher return than the core Refining & Marketing business," noted Jefferies analyst Iain Reid in an April research note. At a recent conference, Greg Garland, the CEO of Phillips 66, said he plans to grow those businesses using 50% of the company's expected capital expenditure, up from levels of 16%. While Reid expects that the newly split companies will continue to trade in line with peers, "we see good potential for the downstream company to improve this position over time."

The unit is the second largest refiner in the U.S., when counting its petrochemicals joint venture with Chevron and its midstream joint venture with Spectra Energy. Of Phillips 66's $5.9 billion in earnings in the last three years, the company's refining & marketing unit accounted for 66% of profit, while chemicals accounted for 20% and midstream 14%, notes Gheit of Oppenheimer.

"Its large and balanced assets portfolio, with more than 80% of the capital employed in the US, provides attractive investment opportunities and a superior risk-return profile, in our view," adds Gheit.

Summing up the analyst bullishness on the ConocoPhillips split in the simplest terms: bigger isn't necessarily better when it comes to the recently stalled Big Oil stock sector.

For more on oil and gas M&A, see 5 energy deals not to be forgotten in 2012 and Chesapeake Energy's flurry of asset sales.

-- Written by Antoine Gara in New York
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