A car refuels at a Phillips 66 fuel station in Rockford, Illinois, U.S., on Monday, July 29, 2019.
Daniel Acker | Bloomberg | Getty Photographs
Firm: Phillips 66 (PSX)
Enterprise: Phillips 66 is an power manufacturing and logistics firm. It operates via the next segments: midstream, chemical substances, refining, and advertising and marketing and specialties. The midstream section supplies crude oil and refined petroleum product transportation and processing companies, in addition to pure fuel and pure fuel liquids transportation, storage, fractionation, gathering, processing and advertising and marketing companies. The chemical substances section consists of Phillips 66’s 50% fairness funding in Chevron Phillips Chemical (CPChem), which manufactures and markets petrochemicals and plastics on a worldwide foundation. The refining enterprise refines crude oil and different feedstocks into petroleum merchandise, equivalent to gasoline, distillates and aviation fuels, in addition to renewable fuels, at 12 refineries within the U.S. and Europe. The advertising and marketing and specialties section purchases for resale and markets refined petroleum merchandise and renewable fuels.
Inventory Market Worth: $57.06B ($129.70 per share)
Activist: Elliott Funding Administration
Share Possession: n/a
Common Value: n/a
Activist Commentary: Elliott is a really profitable and astute activist investor. The agency’s group consists of analysts from main tech personal fairness companies, engineers, working companions – former expertise CEOs and COOs. When evaluating an funding, the agency additionally hires specialty and common administration consultants, professional price analysts and trade specialists. The agency usually watches firms for a few years earlier than investing and has an intensive secure of spectacular board candidates. Elliott has traditionally targeted on strategic activism within the expertise sector and has been very profitable with that technique. Nevertheless, over the previous a number of years its activism group has grown and developed, and the agency has been doing much more longer-term activism and creating worth from a board degree at a a lot bigger breadth of firms. The agency’s activism has all the time been nicely thought out and the detailed evaluation it introduced right here is proof of that.
What’s taking place
Behind the scenes
Activist buyers like to say that they’re “amicable” or “constructive.” Whereas we don’t generalize like that, it’s arduous to think about a extra amicable and constructive activist marketing campaign than what Elliott is proposing at Phillips 66.
Phillips 66 has underperformed friends Valero Power and Marathon Petroleum by 45% and 191%, respectively, over the previous three years and by 163% and 248%, respectively, over the previous 10 years. Elliott thinks this will largely be attributed to the corporate’s shift in focus away from the refining section and administration’s poor execution in price reductions, which has led to a lack of investor confidence.
Since his elevation to CEO in July 2022, Mark Lashier has dedicated to a strategic outlook that features refocusing on the refining section, chopping prices, focusing on $14 billion of mid-cycle earnings earlier than curiosity, taxes, depreciation, and amortization by 2025, promoting $3 billion of non-core property and rising the corporate’s long-term capital return coverage. Elliott wholeheartedly agrees with this plan and thinks it might result in a $205 inventory value. The primary a part of an activist marketing campaign, convincing administration that your plan is healthier than theirs, is already finished right here. The one factor activists like greater than a administration group agreeing with the activist’s plan is a administration group that has its personal plan that the activist agrees with.
However speaking a plan to the market is one factor, getting buyers to imagine you could execute is completely one other. There was an absence of shareholder belief right here, a lot of which stems from the corporate’s AdvantEdge66 program in 2019, aimed toward lowering prices. When carried out, Phillips 66 noticed prices enhance relative to friends, burning shareholders’ confidence within the administration group’s capability to realize its objectives. Step one in rebuilding administration credibility can be including new administrators to the board, significantly on the request of a shareholder. If these administrators occurred to have refining operations expertise, that will give buyers much more confidence that administration is shifting their focus again to the refining enterprise.
Elliott has important expertise in partnering with trade consultants and has already recognized candidates right here with related experience to fill two board seats. Elliott is just not asking for a board seat for itself to debate with administration. The agency is asking for 2 seats for 2 trade executives who would put administration in the very best place to execute on their plan. The perfect activists use board seats to help administration in executing their plan, however additionally they will maintain administration accountable if they’re unable to take action.
That’s the place Elliott’s plan B comes into play. If Phillips 66 provides two new administrators permitted by Elliott and nonetheless can not ship on efficiency targets over the following yr, then it might want to take a path just like the one Marathon Petroleum took in its transformation. It will embrace making acceptable administration modifications, closing the present $2 to $3 per barrel refining EBITDA hole between Phillips 66 and Valero and producing $15 billion to $20 billion from the sale of non-core property, together with their CPChem stake, European comfort shops and a portion of non-operated midstream stakes.
This must be a straightforward resolution for the corporate, and we might count on it to shortly appoint two new administrators recognized by Elliott to the board. Given the tone and substance of Elliott’s outreach, it might be very shocking and disappointing to see this go to a proxy battle. Nevertheless, if it did, we imagine Elliott can be a lock to get no less than two board seats on the 13-person board, significantly with using a common proxy card.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.