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Phillips 66 Under Pressure from Activist Investor Elliott Management
The Phillips 66 Los Angeles Refinery Wilmington Plant is a key facility within the company’s expansive network, showcasing its operations in Wilmington, California.
Company Overview
Business: Phillips 66 is a major player in energy manufacturing and logistics, divided into four main segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment focuses on transporting crude oil and refined products, offering terminaling and processing services, while the Chemicals sector includes a notable 50% investment in Chevron Phillips Chemical Company LLC, which operates globally in petrochemical production. The Refining segment processes crude oil into various petroleum products, including gasoline and renewable fuels. Finally, the Marketing and Specialties segment is responsible for the resale of refined products and renewable fuels.
Market Capitalization: $52.88 billion (priced at $128.04 per share)
Activist Investor: Elliott Investment Management
Ownership Stake: Approximately 4.6%
Investment Strategy: Elliott Investment Management is recognized for its activist investment strategies. Comprising a team of analysts and former executives from leading tech firms, Elliott conducts extensive research and analysis before making investment decisions. Its strategy has gradually expanded beyond technology into broader governance-oriented activism across various sectors.
Current Developments
On February 11, Elliott penned a letter and accompanying presentation to Phillips 66’s board, launching an initiative dubbed “Streamline66” aimed at addressing the company’s lackluster performance and inadequate corporate governance. The proposal outlines several strategies, including: (i) reevaluating the portfolio by potentially divesting the midstream business and its stake in CPChem; (ii) initiating an operating review with ambitious refining targets; and (iii) increasing managerial oversight by appointing independent directors to the board.
Market Context
Phillips 66 operates within a multifaceted environment, wielding four segmented assets that ensure competitive edge and scalability. Despite having substantial capabilities, the company’s stock trades at a discount compared to its actual value. Most of its earnings come from the higher-value segments (Midstream, Chemicals, and Marketing) but its valuation remains tethered to the lower-performing Refining segment. This disconnect has resulted in decreased total returns when compared to rivals like Valero Energy and Marathon Petroleum over various timeframes.
Initial engagement by Elliott with Phillips 66 occurred in November 2023, triggering a conversation around the company’s operational shortcomings, particularly in navigating the refining super-cycle and managing rising operational expenditures. Despite acknowledging potential share price targets above $200, Elliott also highlighted concerns regarding the execution of management’s strategies.
In a notable shift, Elliott expressed its desire for active engagement rather than adversarial intervention, striving for collaboration with CEO Mark Lashier. Their discussions led to the appointment of Robert Pease, a former Cenovus executive, to the board as part of an agreement to enhance board competence. However, the anticipated second director has not materialized.
Fast forward to now, and Elliott has ramped up its investment in Phillips 66 to approximately $2.5 billion, indicating a readiness to exert more influence over company strategy, as demonstrated by the “Streamline66” presentation. Elliott has identified three core issues underlying the company’s underperformance: an inefficient conglomerate structure obscuring intrinsic value, inadequate operational execution falling short of established profitability targets, and diminished management credibility due to unmet turnaround claims.
The proposed plan from Elliott sets forth key initiatives: (i) divesting midstream assets, with potential proceeds estimated between $40 billion to $45 billion; (ii) selling off CPChem and JET, potentially netting another $48 billion; and (iii) enhancing board oversight through new appointments. Executing this framework could enable substantial share repurchases and align cash flow distributions with those of competitors.
Looking Ahead
Elliott forecasts that if implemented effectively, its strategies could elevate Phillips 66’s share price substantially, with estimates reaching approximately $200, or even over $300 in comparison to prior market performance. The activist investor’s history, particularly with Marathon Petroleum, demonstrates a tailored approach to enhance shareholder value through strategic leadership changes and operational improvements.
As the nomination period for board elections approaches, it remains to be seen whether Elliott will push for multiple director nominations to bolster its influence on governance and accountability within Phillips 66, particularly in light of past management shortcomings.
Ken Squire is an expert in shareholder activism and the founder of 13D Monitor, an institutional research service focused on investor engagement.
Source
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