ConocoPhillips (NYSE: COP ) is the largest exclusive E&P company in the world. The company owns a lot of acreage in promising shale plays such as the Eagle Ford, the Permian Basin, and Bakken as well as Canadian oil sands. Many of its fields should be profitable even if the price of oil should fall. For example, ConocoPhillips' incremental finding and development cost for the Eagle Ford and Bakken is just $20 per barrel of oil equivalent.
So why did Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, sell 43% of his stake in ConocoPhillips?
It is telling that Warren Buffett held on to Phillips 66 (NYSE: PSX ) , the refiner that ConocoPhillips spun off last year, while selling ConocoPhillips. At the end of September 2013, Berkshire had nearly 27 million shares of Phillips 66 and only 13.5 million shares of ConocoPhillips.
It seems like Warren Buffett likes refiners going forward and may have sold ConocoPhillips in part because it did not have any refining capability.
After the spinoff, Phillips 66 is now the nation's largest independent refiner. Due to the wide WTI-Brent spread, crack spreads are extremely profitable. The spread may continue to be profitable as the U.S. continues to churn out oil from unconventional oil plays while Brent becomes more expensive as China and India develop. Phillips 66 is up nearly 40% year to date versus ConocoPhillips' 30% year-to-date return.
Return on capital employed
Integrated oil companies generally have more synergy than stand-alone upstream companies. ExxonMobil (NYSE: XOM ) , the company that Warren Buffett recently took a position in, has a return on capital employed of 25%. ConocoPhillips has a return on capital employed of only 11%. Since Warren Buffett is a long-term holder, return on capital employed matters a lot. Generally oil companies that have a higher return on capital employed are more disciplined in which projects they chose and where they spend their money. That higher discipline allows companies to return more capital to shareholders in good times and have better balance sheets to weather storms in bad times.
Share price volatility
Warren Buffett likes to buy stocks with low volatility. According to the Yale paper Buffett's Alpha , the secret to Warren Buffett's success is that he buys low-volatility stocks that don't fall very much in bear markets but perform similarly well in bull markets and levers them up with low cost insurance float.
ExxonMobil is less volatile than ConocoPhillips. ExxonMobil has a beta of 0.57 versus ConocoPhillips' beta of 1.14.
In 2008, when the S&P 500 fell 38%, ExxonMobil fell 15% versus ConocoPhillips' fall of 41%.
The bottom line
Warren Buffett still likes big oil. He owns 13.5 million shares of ConocoPhillips, but he likes ExxonMobil a bit more in terms of risk-adjusted returns. That doesn't mean that ConocoPhillips is a bad investment, however, and long-term investors in the company should continue to see rewards.
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