Here’s how activist Elliott could build shareholder value amicably at Phillips 66


A car refuels at a Phillips 66 gasoline station in Rockford, Illinois, U.S., on Monday, July 29, 2019.

Daniel Acker | Bloomberg | Getty Images

Company: Phillips 66 (PSX)

Business: 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 providers, in addition to pure gasoline and pure gasoline liquids transportation, storage, fractionation, gathering, processing and advertising and marketing providers. 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, similar 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.

Stock Market Value: $57.06B ($129.70 per share)

Activist: Elliott Investment Management

Percentage Ownership:  n/a
Average Cost: n/a
Activist Commentary: Elliott is a really profitable and astute activist investor. The agency’s crew contains analysts from main tech non-public fairness companies, engineers, working companions – former expertise CEOs and COOs. When evaluating an funding, the agency additionally hires specialty and basic administration consultants, professional value analysts and business specialists. The agency usually watches corporations for a few years earlier than investing and has an intensive steady of spectacular board candidates. Elliott has traditionally centered on strategic activism within the expertise sector and has been very profitable with that technique. However, over the previous a number of years its activism group has grown and advanced, and the agency has been doing much more longer-term activism and creating value from a board stage at a a lot bigger breadth of corporations. The agency’s activism has at all times been effectively thought out and the detailed evaluation it introduced right here is proof of that.

What’s occurring

Behind the scenes

Activist buyers like to assert that they’re “amicable” or “constructive.” While we don’t generalize like that, it’s onerous 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 Energy 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 could largely be attributed to the corporate’s shift in focus away from the refining section and administration’s poor execution in value 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, reducing prices, concentrating on $14 billion of mid-cycle earnings earlier than curiosity, taxes, depreciation, and amortization by 2025, promoting $3 billion of non-core belongings and rising the corporate’s long-term capital return coverage. Elliott wholeheartedly agrees with this plan and thinks it could result in a $205 inventory worth. The first a part of an activist marketing campaign, convincing administration that your plan is best than theirs, is already accomplished right here. The solely factor activists like greater than a administration crew agreeing with the activist’s plan is a administration crew that has its personal plan that the activist agrees with.

But speaking a plan to the market is one factor, getting buyers to imagine you could execute is fully one other. There has been an absence of shareholder belief right here, a lot of which stems from the corporate’s AdvantEdge66 program in 2019, aimed at lowering prices. When carried out, Phillips 66 noticed prices enhance relative to friends, burning shareholders’ confidence within the administration crew’s skill to realize its targets. The first step in rebuilding administration credibility could be including new administrators to the board, significantly at 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 vital expertise in partnering with business consultants and has already recognized candidates right here with related experience to fill two board seats. Elliott just isn’t asking for a board seat for itself to debate with administration. The agency is asking for 2 seats for 2 business executives who would put administration in the very best place to execute on their plan. The greatest 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 is the place Elliott’s plan B comes into play. If Phillips 66 provides two new administrators permitted by Elliott and nonetheless can’t ship on efficiency targets over the subsequent 12 months, then it might want to take a path just like the one Marathon Petroleum took in its transformation. This will embody making applicable 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 belongings, together with their CPChem stake, European comfort shops and a portion of non-operated midstream stakes.

This ought to be a straightforward determination for the corporate, and we might anticipate it to rapidly appoint two new administrators recognized by Elliott to the board. Given the tone and substance of Elliott’s outreach, it could be very stunning and disappointing to see this go to a proxy combat. However, if it did, we imagine Elliott could be a lock to get at least two board seats on the 13-person board, significantly with the usage of 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. 

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