Should You Join Warren Buffett and Sell This High Yielding Oil Stock?

Photo credit: ConocoPhillips

Like most devoted investors I pay attention to the moves of Warren Buffett. His track record is awe-inspiring and so when he buys or sells a stock it is a reason to take notice.

His latest moves are raising eyebrows in the energy industry, and for good reason. It was revealed that Buffett's holding company, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , is taking a major stake in oil giant ExxonMobil (NYSE: XOM  ) while at the same time cutting its stake in ConocoPhillips (NYSE: COP  ) . It's an interesting move to say the least.

One can only speculate why Buffett is making this move now. But being a man who values, well, value, that's likely what fueled Buffett's latest move. As the chart below shows, ConocoPhillips' stock has risen significantly over the past year and a half. At the same time, ExxonMobil's stock has underwhelmed.

COP Total Return Price Chart

COP Total Return Price data by YCharts

One might expect after looking at that chart the ExxonMobil is a screaming value, especially relative to ConocoPhillips. Surprisingly, that is not the case as ConocoPhillips trades at a price-to-earnings ratio of 11, while Exxon's is 12.3 times. That being said, true value isn't found in ratios or price movements.

In fact, there certainly is a case to be made for Exxon's value. As fellow Fool Tyler Crowe recently pointed out big oil is going to be spending less in capital projects in the years ahead as it cashes in on the big projects that have been developed over the past few years. As Exxon spends less it could use more cash flow to buy back stock or supercharge its dividend.

That is one of the major difference between how the two oil companies use cash. Exxon's focus for years has been to use a large portion of its cash to buy back stock. ConocoPhillips, on the other hand, sees its dividend as its highest priority use of cash flow. It believes this enhances capital discipline and offers its investors a more predictable return. Because of this ConocoPhillips dividend is currently yielding 3.8%, while ExxonMobil's dividend yield is 2.67%.

Further, one of the reasons ConocoPhillips' stock has done so well is because the company has focused on unlocking the value of its assets. It spun off shares of Phillips 66 (NYSE: PSX  ) , which have doubled in value. It has sold a number of other lower-margin assets in order to reinvest that cash in its highest value opportunities. This has ConocoPhillips well on its way to accomplishing its goal that has production and margins projected to grow by 3%-5% annually through 2017.

ExxonMobil on the other hand offers pretty meager production growth. It has only grown its production by about 1% annually over the past few years. Further, its plan is to grow its production by about 2%-3% annually through 2017. That said, what ExxonMobil has done is use its excess cash to buyback an impressive amount of its stock. Since 2008 each share of ExxonMobil has an interest in 21% more production than it did back then. That's 5% annual production growth.

For Buffett, the switch to ExxonMobil appears to be centered on Exxon's ability to use its excess cash to retire shares. With more cash available to the company in the future, there is a near-term catalyst for the company to fuel returns.

But for income investors, ConocoPhillips remains a pretty compelling opportunity. As the company grows its production and margins in the years ahead it will have more cash available to it to pay dividends.That's why I don't think income-focused investors need to follow Buffett. While ConocoPhillips might have unlocked most of the value of its assets, those that are left will throw off a ton of cash in the future. That cash will be used to reward current investors, not to pay off investors that are leaving the stock via a buyback.

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