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

Tickers in this article: XOM COP

NEW YORK (TheStreet) -- The best Big Oil stock may be the one planning to become smaller.

Investors looking to find stock profits in the gargantuan but slow-growing earnings of Big Oil companies have been disappointed in 2012, but as May approaches, there's reason to focus on the upcoming split of ConocoPhillips (COP) over the earnings results of ExxonMobil(XOM) , which again disappointed investors.

As industry giants like ExxonMobil, Chevron (CVX) , BP (BP) and Royal Dutch Shell (RDS.A) lag rising markets, an ambitious breakup strategy by ConocoPhillip may be a strong target for those in search of a needle-moving investment within a Big Oil group of stocks that don't seem to budge.

After ExxonMobil reported that its first quarter profit dropped 11% to $9.45 billion, or $2 a share on Thursday -- missing Wall Street consensus of $2.09 -- it's hard for investors to be encouraged. Slowing energy production that is cutting into earnings and a share price not keeping pace with rising markets can make a profit that rivals the GDP of nations seem inconsequential. Even a 21% dividend raise by dividend laggard Exxon Mobil -- announced a day before the weak earnings -- wasn't enough to keep shares from selling off. ConocoPhillip's split into two separate oil exploration and refining companies, on the other hand, may be a worthwhile investment for Big Oil-inclined investors.

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According to Oppenheimer energy analyst Fadel Gheit, the move "will create two strong companies, including the largest E&P company in terms of production, proved reserves and market value, and the second-largest refiner in the US." Gheit estimates that after the split and previously announces asset divestiture programs, both companies will have stronger balance sheets and higher dividend yields than their new non-integrated oil industry peers.

"A successful implementation of the divestiture program and the use of proceeds to reduce debt and supplement operating cash flow in funding profitable growth could provide the needed catalyst to boost stock performance further."

On May 1, ConocoPhillips will spin its downstream unit that includes a chemicals and refining and marketing business into a new publicly traded stock, Phillips 66 , ticker symbol "PSX." ConocoPhillips shareholders will get a share of PSX for every two shares of their existing shares, while retaining their interest in the company's upstream oil exploration business, which is among the largest in the U.S.

"COP will continue its 'shrink to grow' strategy by selling non-core assets and investing in high-return projects, while PSX will reduce its refining focus by selling assets and shifting capex to high-return petrochemicals and midstream projects," adds Gheit.

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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