Elliott Investment Management's push for change at Phillips 66 borrows straight from its successful playbook at Marathon Petroleum. In other words, it would probably be a mistake for Phillips 66 to ignore it.
The activist investor said on Wednesday that it had taken a roughly $1 billion stake in U.S. refining giant Phillips 66 and pushed the company to sell noncore assets, focus more on its main refining business and fix its track record of relatively high operating costs.
Phillips 66 has the most diverse portfolio among its peers, with large exposure to midstream, marketing and, most notably, a stake in chemicals business CP Chem with Chevron. In theory that means the company could capture more from the full value chain, but the sprawling structure hasn't done much for its performance in recent years. Its refining segment has been less efficiently run than competitors' and its share-price performance has lagged behind them. Phillips 66's refining operating expenses were more than $7 a barrel last year, compared with about $6.46 a barrel for Marathon and $5.11 a barrel for Valero Energy, according to Visible Alpha.
The company has an attractive refining footprint. It has the second-lowest gasoline yield among refiners—a benefit lately since margins are much higher on diesel these days than gasoline, according to Matthew Blair, equity analyst at TPH & Co. Furthermore, it has high exposure to the heavy Canadian crude oil that is selling at an attractive discount.
Blair notes that Phillips 66's diversified portfolio is probably the main reason the company's implied refining-only enterprise value, as measured as a multiple of 2024 earnings before interest, taxes, depreciation and amortization, is lower than its two large peers, even after the recent surge.
Many of Phillips 66's missteps—the lack of focus on refining and the failure to deliver on cost cuts—were under the company's old chief executive, who left last year. The new boss had already announced some targets along similar lines: The company in late October said it would try to monetize some noncore assets and said it would cut $1.4 billion of costs by year-end 2024. Investors liked what they heard, and the refiner's shares appreciated 6.4% in the month following that announcement. They liked Elliott's involvement even more, though: Shares are up 9.9% in the few days since the letter was published.
While Phillips 66 was already headed in a similar direction, Elliott's participation might spur more drastic changes and more accountability. The activist investor, for example, is suggesting the company could sell $15 billion to $20 billion of assets, much more than the company's own $3 billion-plus target. And while Elliott isn't trying to replace anyone, it is pushing to add two new board members with refining-operations experience, a step that might hold management more accountable on cost discipline in that segment.
It is familiar territory for Elliott, whose involvement in Marathon Petroleum four years ago led to a sale of the company's Speedway gas-station chain and a new chief executive. Marathon Petroleum has delivered about 346% in total shareholder returns since announcing the Speedway sale, vastly outperforming Valero (at 164%) and Phillips 66 (144%). In a research note published last year, BMO Capital said Marathon's operational execution had improved since the Speedway sale.
Phillips 66 already has a pretty straightforward, proven path to share-price appreciation. With Elliott at its heels, it might get there faster.