ConocoPhillips Downgraded: Spin-Off Could Send Shares Lower, Says UBS

[Stocks-to-Watch]

ConocoPhilips (COP) is expected to spin off its downstream operations before May, and UBS analyst William Featherston thinks the company’s valuation could suffer after the spin-off. He downgraded COP to Sell today.

“The market will be forced to look at COP on a sum of the parts basis and we believe the increased transparency highlights a premium E&P valuation despite sub-par growth/assets,” he wrote.

“We expect valuation multiple contraction due to four factors: 1) below average long term production target growth rate of 3-4% vs. the large-cap E&P peers average of 8-9%; 2) downward re-valuation due to the shift to cash flow multiples from artificially depressed earnings multiples; 3) low organic free cash flow limiting future buybacks without a.sset sales & potential risk to dividend/growth in the event of a cyclical oil price pullback; & 4) the need to make acquisitions post spin-off to boost production growth relative to the E&P peers.”

Original Article Source by Barrons.com