Activist investor Elliott Management has increased its stake in Phillips 66 (Houston) and issued a new call to streamline the company’s portfolio by spinning off its midstream business and selling its stake in Chevron Phillips Chemical (CPChem; The Woodlands, Texas), a 50/50 joint venture with Chevron, as per Chemweek.
“Phillips today trades at a substantial discount to a sum-of-its-parts valuation, and investors have plainly lost confidence in the Company's ability to unlock this value under its current structure,” Elliot stated in a Feb. 11 letter to the Phillips 66 board of directors.
In a press release, Elliott revealed that it has increased its stake in Phillips 66, formerly about 2%, to about $2.5 billion, or about 5%, making it one of the company’s top five investors.
Elliot originally made its case for a change of direction at Phillips 66 in a letter to the board sent in November 2023.
“Investors were hopeful the company would finally take the necessary actions to improve its operations and realize the significant potential of its underappreciated assets,” Elliot said in the press release. “Unfortunately, this progress has failed to materialize, and it has become evident that urgent changes are needed.”
In the new letter to the board, Elliot said Phillips 66 had “abandoned serious collaboration on board and corporate governance improvements by failing to honor its commitment to add a second director and reverting to a combined CEO-chairman role.”
Elliott’s recommendations to Phillips 66 include portfolio simplification, an operating review and enhanced oversight. “A streamlined Phillips would include the sale or spinoff of the midstream business, the sale of the company’s interests in CPChem and the sale of the JET retail operations in Germany and Austria,” the letter said.
Phillips 66 said it will review Elliott’s recommendations. “The board and management team regularly review the company’s strategic direction and progress toward achieving our objectives, consistent with maximizing shareholder value, and welcome the perspectives of all shareholders,” said a company spokesperson said in a statement. “Phillips 66 is on the right path, and we are realizing our vision of being the leading integrated downstream energy provider.”
The sell-off of Phillips 66’s midstream assets, which include CPChem and DCP Midstream, could create some logistical issues. Phillips 66 has worked to integrate its petrochemicals and NGLs into its refining operations as one of its strategies to improve operational performance.
“We see a potential spin of the midstream business as outlined by Elliott as negative for the credit profile of the remaining refining business, all else equal,” wrote Jeremy Tonet, an analyst with JP Morgan in a research note.
Tonet highlighted the value of more diversified refiners like Marathon Petroleum and Phillips 66 to pure-play refiners for cash generation in riding out refining margin cycles. “Diversifying cash flow streams away from refining, which can be extremely cyclical in nature at times, was a credit positive in our view,” he wrote.
In refining, Phillips 66 has focused on smaller, low-cost, quick-hit refinery projects to improve margins, margin capture and reliability. During the fourth-quarter earnings call on Jan. 31, the company said that over the past four quarters, its refineries operated at crude utilization rates above industry standards while it reduced operating costs and increased margins. The company reached its goal of reducing refinery operating costs by $1/b by the end of 2024.
“We do believe Phillips 66 has shifted its focus in recent years back towards refining operations and continues to pursue reliability and capture initiatives that could help close the gap from here, while Elliott appears to be pushing for additional board oversight and a review of management to achieve this goal,” wrote John Royall, JPMorgan analyst in a research note.
According to Elliott Management’s letter, Phillips 66 shareholders have been punished for waiting for the company to act fully upon its earlier recommendations, which included adding two board members with refining experience.
“Phillips has failed to make meaningful progress on its targets,” said Elliott Management’s letter. “And despite possessing valuable assets and a clear, achievable path to realizing their full potential, Phillips’ total shareholder return has continued to disappoint, lagging well behind peers. Over the past decade, Phillips has underperformed Valero by 138% and Marathon by 188%.”
In its statement, Phillips 66 said it is progressing toward its goals. “Our 2024 results reflect our continued strong operating performance and success in achieving the strategic commitments we communicated in 2022 and 2023. With these goals achieved and exceeded, we have set targets for our next phase through 2027, which are designed to drive even greater long-term shareholder value through strong operating performance and disciplined capital allocation.”
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