Elliott Investment Management, a prominent US activist investment firm, has recently acquired a $1 billion stake in Phillips 66, a leading US oil refiner and pipeline operator.
In a letter addressed to the company’s board, Elliott urged for a revamp of the board to improve the company’s lagging performance. The firm believes that with the right changes, Phillips 66’s stock, currently trading at around $118 per share, could potentially reach $200.
Despite setting sensible performance targets, Phillips 66 has been struggling to keep up with its US refining competitors, especially at a time when fuel demand and margins have been soaring for the industry. The company’s second-quarter earnings fell short of Wall Street’s estimates, but its executives have outlined a plan to boost returns by cutting costs and assets. Additionally, they have announced their intention to sell or spin off $3 billion in assets next year.
Phillips 66’s Chief Executive, Mark Lashier, has acknowledged discussions with Elliott but has not confirmed whether the company is open to adding two Elliott-recommended directors to its board. In a statement, Lashier stated that the company plans to continue a constructive dialogue with Elliott and values their perspectives, as well as those of other shareholders, on their strategy and actions to drive long-term sustainable growth and value creation.
“We remain committed to acting in the best interests of our shareholders,” he added.
Following the release of the letter, Phillips 66’s shares, which have a market value of $52 billion, saw a 3.3% increase, reaching $121 per share. However, prior to this, the company’s stock had only seen an 8.3% increase in the past year, compared to a 21.5% gain at its larger rival, Marathon Petroleum.
Elliott has expressed its concerns over Phillips 66’s refining operations, stating that the management has taken its “eye off the ball” by allowing operating expenses to soar. The firm believes that investors have lost confidence due to the company’s underperformance in refining and poor execution of its cost-reduction efforts.
In an effort to enhance the board’s expertise in refining operations, Elliott has identified potential director candidates.
Currently, Phillips 66 has 13 board members, and Elliott believes that adding two new directors with refining-operating experience would be beneficial for the company.
According to Garfield Miller, head of investment firm Aegis Energy Advisors, energy companies have become a target for activist investors following the success of Engine No. 1’s fight with Exxon Mobil in 2021, which resulted in the addition of three new directors to the company’s board.
“Activist investors brought focus and change to these refiners,” Miller said, referring to a 2019 campaign that ushered in changes at Marathon Petroleum.
While Elliott has shown support for the current management team, including CEO Mark Lashier, who took on the role last year, the firm believes that they must demonstrate meaningful progress against their targets.
“Lashier and the rest of the management team deserve investor support so long as they demonstrate meaningful progress against these targets,” the letter said, adding that it also understood market skepticism.
