Wednesday, May 2, 2012

ConocoPhillips Spinoff

Yesterday the ConocoPhillips spinoff into two companies went through. Phillips 66 (PSX) was spunoff from the parent company of Conoco (COP) to create value for shareholders. Phillips 66 is now comprised of the refining and pipeline business while Conoco is now the largest pure exploration and production company. Shareholders received 1 share of PSX for every 2 shares of COP.

Let's go through the calculations to figure out your new cost basis.

Original Shares of COP - 21

Original Cost for COP shares - $1,386.88

Next we wait need the closing price from the 1st trading day, May 1st in this situation.

COP - $56.51

PSX - $32.76

Now you need to know the split ratio. For every 2 shares of COP you received 1 share of PSX.

Shares of new companies are easy enough to calculate. You retain the original amount of shares in COP and the new shares in PSX are multiplied by the spinoff ratio.

New Shares of COP = Original Shares of COP = 21

New Shares of PSX = Original Shares of COP * Split Ratio = 21 * 1/2 = 10.5

To calculate the % of your cost basis that relates to the 2 companies you calculate as follows:

COP % = COP Close / (COP Close + PSX Close / 2) = $56.51 / ($56.xx + $32.76 / 2) = 77.53%

PSX % = (PSX Close / 2) / (COP Close + PSX Close / 2) = $32.76 / ($56.51 + $32.76 / 2) = 22.47%

So the proportion of the original cost basis for each company is then:

Cost Basis COP = COP % * Original Cost = 77.53% * $1,386.88 = $1,075.22

Cost Basis PSX = PSX % * Original Cost = 23.xx% * $1,386.88 = $311.66

Your cost basis per share is now easy to calculate as follows:

Cost Basis per Share COP = Cost Basis COP / New Shares of COP = $1,075.22 / 21 = $51.20

Cost Basis per Share PSX = Cost Basis PSX / New Shares of PSX = $311.66 / 10.5 = $29.68

Fractional shares will not be issued in this situation. Meaning that we calculated we should receive 10.5 shares in PSX but when you check your brokerage account it will only show 10 shares. Don't fret because you will receive cash in lieu of fractional shares. In other words, you will receive the cash value of the fractional share portion of your PSX stock. In this case that would be the cash value of 0.5 shares.

Your final numbers would look like this.

21 Shares of COP with a total cost basis of $1,075.22 or a cost basis per share of $51.20.

10 Shares of PSX with a total cost basis of $311.66 or a cost basis per share of $29.68.

Cash in lieu of fractional shares of 0.5 shares * Close of PSX = $16.38.

I hope this helps you out because I had forgotten about the spinoff happening yesterday so it was a nice surprise when I checked my brokerage account. When I tried looking online for how to calculate the cost basis all I could find was how to calculate it based off a 1:1 spinoff which doesn't help in this situation. I calculated it that way and it was giving a cost basis per share of PSX around $50.00 which was definitely not right because you would be starting off with a $20 / share loss.

My final numbers play out like this.

Shares of COP = 16.296
Shares of PSX = 8
Total Cost Basis COP = $834.37
Total Cost Basis of PSX = $241.85
Cost Basis per share COP = $51.20
Cost Basis per share PSX = $29.68
Cash in lieu of fractional shares = $4.85

Also, your cash in lieu of fractional shares can actually be reported as a capital gain instead of being taxed as ordinary income. In my situation it doesn't matter because I originally purchased the shares of COP less than a year ago. But for anyone with a long term capital gain situation that could save you some money albeit not that much since at most your looking at the capital gains based off of 0.999 shares.

8 comments:

  1. Thanks a heap---you're a savior of much frustration

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    Replies
    1. No problem. Glad to help out. Thanks for stopping by!

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    2. Wouldn't you cost basis for COP be 2/3 of what you paid originally for the stock? Similarly, wouldn't the cost basis of PSX be 1/3 of what you originally paid for COP?

      Please see "Spinoffs" in the following document:
      http://www.nj.com/business/ledger/stories/biz101/costbasis.pdf

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    3. The cost basis is based off the value assigned to the two companies not necessarily the shares that you now have. The parent company should have a market value % based off the size of the now 2 companies. You would then take that % and assign multiply it to your original cost basis. I know it seems like it should be 2/3 and 1/3 in the COP/PSX situation based off shares but the number of shares are irrelevant to the value. In the pdf you linked to it says how it's based off the value not number of shares. In their example 75% of your cost basis was to be allocated to ABC Corp and 25% to DEF. If you go off the shares you now own it would have been 100/120 = 83% ABC and 20/120 = 17% DEF. Hope this cleared that up for you.

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    4. This is what happens when I hurry. Ha!

      Yes, I am incorrect in the 1/3 & 2/3 valuations.

      I'm not trying to be argumentative in the following. I'm trying to make sure that the cost basis calculation is done correctly for anyone that had COP stock on May 1, 2012.

      Quoting the article: "At the time of the spinoff, the company assigns a percentage of its value to stay with the parent and a percentage to go with the spinoff..."

      Unless I misunderstand your methodology - which is possible - you calculated a ratio based upon the end of trading on May 1st instead of using a figure supplied by Conoco Phillips for the "percent of value" of COP & PSX.

      This phrase "...the company assigns a percentage..." was what caused me to question your method of calculating the cost basis for COP & PSX.

      I just went to the PSX web site and discovered a FAQ regarding this very issue.

      http://www.phillips66.com/EN/investor/shareholder_services/faqs/Pages/faqs.aspx

      To my surprise the company's approach was to assign a percentage value based on the Fair Market Value (FMV) on the day of distribution. They muddy the water further by stating "There are many potential ways to determine the FMV of COP and PSX common stock."

      Well that's just great!

      ...but then they go on to demonstrate "...one example..." that uses the average NYSE trading price for COP & PSX on May 1st. At the end of that drill, the new COP cost basis is given as 77.09% of the original COP purchase price and the PSX cost basis is given as 22.91% of the original COP purchase price.

      The following is the IRS Form 8937 filed by Conoco Phillips regarding this issue:

      http://www.conocophillips.com/EN/investor/shareholder_services/Documents/Form%208937_Tax%20Basis_FINAL.pdf

      What do you think?

      Best regards,

      Scott

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    5. Yeah I think the main problem is that there's multiple ways to calculate what value is assigned to the 2 companies. They used the average of the high and low price of the first trading day or it was the open and closing price. I can't remember. I need to double check on that. My calculations came within a few pennies from what my broker calculated so it's pretty close. I'll have to back calculate to see what they used. I'll check in more about it today and get back with you. Glad we're figuring this out.

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    6. I would think that in general using the 77.09% to COP and 22.91% to PSX would be the easiest. However, with the way the tax code is set up I'm sure you can choose from a variety of ways to arrive at different numbers if they happen to help you out if say you wanted to sell PSX and hold COP since you would want a higher cost basis allocated to PSX. All the calculations should give you a number fairly close to these.

      My broker ended up assigned a 77.85% to COP and 22.15% to PSX. Too many calculation possibilities for the same thing.

      Clear as mud?

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    7. Clear as mud indeed!

      Now if I can just remember these cost basis values when I sell these stocks sometime in the future.

      Thanks for posting this topic and good luck in your investments.

      Best regards,

      Scott

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