Of the large cap oil and gas stocks, ConocoPhillips (NYSE:COP) has been one of the better performers year-to-date, with shares rising over 20 percent. While some analysts are cautioning that the shares have run too far, I think there is still more upside ahead.
ConocoPhillips set itself apart from its mega-cap integrated oil peers by splitting its upstream and downstream businesses into separate entities. ConocoPhillips is the upstream business and Phillips 66 (PSX), is the downstream business. For those who aren’t familiar with this terminology, an upstream business is one that is involved in exploration and production, whereas a downstream company is in the business of refining oil and gas and turning them into products that are ready for the marketplace. Both stocks have performed extremely well since the split, as now there are two management teams running two companies with highly specific business models.
In doing this, ConocoPhillips has done a couple of things that should benefit shareholders. The first is that it has streamlined its business. Now that it can focus on just one thing it can operate more efficiently. The second thing it has accomplished is that it has leveraged its profits to the rising oil price. A downstream business only benefits when the oil price rises if the price of gasoline and other oil-based products rise at a faster rate. Otherwise, a rising oil price hurts these companies’ businesses.
As a result, ConocoPhillips has been able to grow its profits while many of its peers have stagnated in this area. It has also been able to expand its production given its new focus. The company is very active in exploration and production throughout the world, although it has been especially active in the Eagle Ford shale region which is one of the richest shale oil deposits in the world. ConocoPhillips has been benefitting from the rise in hydraulic fracking, and this has served to increase the company’s profitability.