The Phillips 66 Los Angeles Refinery Wilmington Plant, captured in a photograph on November 28, 2022, stands as a prominent symbol in Wilmington, California. This image was taken by Mario Tama for Getty Images.
Phillips 66 (PSX) is an energy manufacturing and logistics powerhouse. It structures its operations into distinct segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream division is key to transporting and processing crude oil, petroleum products, natural gas, and natural gas liquids. Its Chemicals segment features a significant joint venture with Chevron, producing and marketing petrochemicals and plastics globally. The Refining branch focuses on transforming crude oil into essential fuels like gasoline and aviation fuels across 12 U.S. and European refineries. Lastly, the Marketing and Specialties segment handles the resale and marketing of refined petroleum and renewable fuels.
As for its market standing, Phillips 66 boasts a stock market value of $52.88 billion, translating to $128.04 per share.
Turning to Elliott Investment Management, which owns approximately 4.6% of Phillips 66. While the firm hasn’t disclosed its average cost of shares, Elliott is known for its strategic activism. This sophisticated firm comprises seasoned professionals from top tech private equity firms, former CEOs, COOs, and a host of specialists. Elliott is celebrated for its effective activism in the tech sector but has recently expanded its focus to governance activism across a broader spectrum of industries.
Earlier this year, on February 11, Elliott sent Phillips 66’s board a detailed proposal, “Streamline66,” designed to combat underperformance and governance lapses. The plan suggests pivotal actions such as divesting or spinning off the midstream operations, possibly selling its stake in CPChem, and introducing independent directors to enhance management accountability.
Behind closed doors, Phillips 66 is a formidable player in energy logistics, organized into four scalable asset segments. Each segment, whether it’s their integrated NGL business or major petrochemical joint venture, holds a competitive edge. Nevertheless, Phillips 66’s overall market value does not reflect the sum of its parts. Aided by multiples from premium segments like Midstream and Chemicals, the company should be thriving, yet it trades closer to its least valued segment, Refining. This misalignment has seen Phillips 66 trail its peers, such as Valero Energy and Marathon Petroleum, by double figures over various periods.
In their initial engagement in late 2023, Elliott took a $1 billion stake and criticized Phillips 66 for its strategic missteps, particularly its lackluster preparation for recent refining cycles and rising operational costs. While Elliott saw the stock’s potential at over $200 per share, they acknowledged the need for better execution.
Elliott’s approach has always been measured. Rather than a confrontational stance, they collaborated with CEO Mark Lashier on performance targets and board appointments. Robert Pease joined as a director in February 2024, with plans for another appointment. Despite this, progress stalled, leading Elliott to increase its stake to $2.5 billion and propose “Streamline66.”
The crux of Elliott’s argument is that Phillips 66’s convoluted structure masks its true value. The firm’s performance targets remain unmet, with profitability slipping behind peers. Furthermore, Elliott criticizes the board for lax governance, where executive compensation seems decoupled from actual performance.
Elliott champions a portfolio overhaul, operational scrutiny, and governance improvements through new directorial appointments. They estimate asset sales like spinning off midstream operations could net up to $48 billion, equating to nearly the company’s market capitalization. Such capital could significantly repurchase shares and boost free cash flow returns to shareholders.
The activist investor sees a path to $200 per share, or even higher, echoing successes like their past interventions in Marathon Petroleum where strategic changes, including leadership shifts and asset sales, drastically improved shareholder returns.
Elliott’s patience has worn thin, and with only one refinery-experienced director added last time, they’re poised to take more assertive action. The upcoming board elections present a prime opportunity for Elliott to push for decisive change, potentially heralding a new era for Phillips 66.
Ken Squire, founder and president of 13D Monitor and manager of the 13D Activist Fund, provides insights into intricate shareholder activism campaigns.
