Activist Shareholders Push For Separation Of Phillips 66’s Midstream Business

Deal Overview

Elliott Investment Management, a prominent activist investor managing approximately $69.7 billion in assets, has recently urged Phillips 66 to undertake significant strategic changes. Elliott, which holds a substantial stake of over $2.5 billion in Phillips 66, is advocating for the divestment or spin-off of the company’s midstream assets, asserting that this move could unlock around $40 billion in shareholder value. Despite its substantial investment, Phillips 66 has not yet formally acknowledged Elliott’s stake.

The activist investor had previously engaged with Phillips 66 in November 2023, offering recommendations on cost reductions and operational enhancements. However, the company’s financial performance has not met expectations, prompting Elliott to intensify its calls for a major restructuring. Elliott’s proposed "Streamline66" plan envisions a significant overhaul, suggesting that strategic measures such as divestitures could elevate Phillips 66’s stock price beyond $200 per share.

Deal Rationale

Phillips 66, established in 2012 as a spin-off from ConocoPhillips, operates across various energy sectors, including refining, midstream, and chemicals. Despite its extensive assets, the company has underperformed relative to industry peers, attributed to inefficiencies in its conglomerate structure and subpar refining performance. Elliott argues that this structure obscures asset value, contributing to a lower stock valuation. The proposed restructuring aims to unlock the true potential of Phillips 66’s assets and improve operational efficiency.

Elliott’s "Streamline66" strategy focuses on streamlining Phillips 66’s operations by separating its midstream business, which currently generates over $4 billion in adjusted EBITDA. By divesting or spinning off this segment, Elliott believes the company can enhance shareholder returns and achieve profitability levels comparable to industry leaders. The plan also entails divesting non-core assets, such as the Chevron Phillips Chemical joint venture and the European JET retail business, to further sharpen the company’s focus.

Activist Investor Arguments

Elliott contends that Phillips 66’s inefficient conglomerate structure, combined with weak operating performance and management credibility issues, has hindered its ability to maximize shareholder value. The company’s refining EBITDA per barrel trails competitors, such as Valero and Marathon Petroleum, underscoring the need for operational improvements. Elliott’s plan includes appointing new independent board members with refining expertise to enhance oversight and align management incentives with shareholder objectives.

Additionally, Elliott highlights Phillips 66’s missed financial targets and the failure of strategic initiatives like "AdvantEdge66" to deliver expected results. The activist investor argues that without fundamental restructuring, Phillips 66 will continue to lag behind its peers, emphasizing the importance of a comprehensive management review and portfolio simplification.

Phillip’s Position

Phillips 66 maintains that its diversified portfolio provides stability in volatile energy markets and has invested in refining profitability through operational efficiencies and new technologies. However, the company’s financial results have remained below expectations, leading Elliott to question the effectiveness of its strategy. Despite investments, Phillips 66’s EBITDA per barrel margins and cash flow from operations have declined, highlighting the urgency for structural changes.

Elliott points to the successful restructuring of Marathon Petroleum, which spun off Speedway in 2020 and achieved significant stock price gains, as a potential model for Phillips 66. By adopting a similar strategy, Phillips 66 could focus on its core refining business, improve profitability, and unlock substantial shareholder value.

Midstream Segment Overview

Phillips 66’s midstream segment, which includes transportation, processing, and export services, generated $18.8 billion in revenue in FY24. Elliott argues that the midstream business, which owns extensive pipeline and terminal networks, is undervalued within the company’s current structure. Spinning off this segment could allow it to be independently valued, realizing its full potential and attracting investors seeking exposure to the midstream sector.

Elliott also criticizes Phillips 66’s recent acquisitions, such as the Epic NGL pipeline, suggesting that the company overpaid for these assets. Despite forecasts of accretive synergies, the actual returns have been disappointing, contributing to declining cash flow from operations. A standalone midstream entity, according to Elliott, could command higher valuations, unlocking an estimated $40 billion in additional value.

Conclusion

Elliott’s campaign for Phillips 66’s transformation underscores the urgent need for strategic restructuring to unlock hidden value and improve profitability. By streamlining its portfolio, enhancing management accountability, and fostering investor confidence, Phillips 66 can address its underperformance and align with industry best practices. Elliott’s "Streamline66" plan, inspired by successful precedents such as Marathon Petroleum’s divestiture, offers a compelling blueprint for Phillips 66’s revitalization. The proposed changes aim to position Phillips 66 as a more focused and competitive player in the energy sector, ultimately delivering significant returns for shareholders.