Market Data
Elliott Investment Management Takes a Major Stake in Phillips 66
Activist investor Elliott Investment Management LP has announced a significant move by building a stake of over $2.5 billion in Phillips 66, a leading energy company. This bold action underscores Elliott’s belief that Phillips 66 is undervalued and has substantial untapped potential. In a detailed letter to Phillips 66’s board, Elliott laid out its strategic recommendations, which primarily focus on the separation or sale of the company’s midstream unit. Shares of Phillips 66 saw an immediate boost, rising nearly 4% in Tuesday morning trading, indicating market confidence in the potential value unlock.
The Midstream Business: A Hidden Gem
Elliott’s primary recommendation is for Phillips 66 to either sell or spin off its midstream business, which is involved in the transportation and storage of crude and refined products. According to Elliott, the midstream unit is a standout business with a value that could exceed $40 billion. The hedge fund argues that separating this business from the broader corporate structure would not only highlight its intrinsic value but also allow it to operate more efficiently and independently. This move could potentially attract more focused investment, improving Phillips 66’s overall financial performance and stock price. Elliott’s stake positions it as one of the top five investors in Phillips 66, giving its suggestions added weight and urgency.
Strategic Divestiture of Non-Essential Assets
In addition to the midstream separation, Elliott is advocating for the divestiture of non-essential assets. Specifically, it recommends that Phillips 66 consider selling its stake in CPChem, a joint venture with Chevron U.S.A. Inc., and certain European retail operations. CPChem, established in July 2000, has been a valuable part of the Phillips 66 portfolio, but Elliott believes that divesting these assets would allow the company to concentrate more fully on its core refinery business. This strategic realignment could enhance capital returns to shareholders by streamlining operations and focusing resources on high-growth, high-margin sectors.
The Need for Independent Directors
Elliott’s recommendations also extend to corporate governance. The hedge fund is urging Phillips 66 to add new independent directors to its board. This move is aimed at bringing fresh perspectives and expertise to the company’s decision-making process. Independent directors are often seen as a way to ensure that the company’s strategic decisions are aligned with shareholder interests and can help in implementing the recommended changes more effectively. The addition of independent directors could also enhance transparency and accountability, crucial elements in building trust with both investors and the market.
Phillips 66’s Recent Performance
When contacted for comment, Phillips 66 did not immediately respond to Elliott’s proposals. However, the company’s recent financial performance provides some context for the investor’s push for change. In the fourth quarter, Phillips 66 reported an adjusted loss of 15 cents per share on revenue of $33.99 billion. While these results beat the expectations of analysts surveyed by Zacks Investment Research, who were predicting a loss of 20 cents per share on revenue of $32.03 billion, the loss still highlights the challenges the company is facing. Elliott’s intervention comes at a time when Phillips 66 is looking to rebound and capitalize on its strengths.
Elliott’s Track Record of Activism
Elliott Investment Management has a well-documented history of successful activism. Last week, for instance, Honeywell, one of the last major U.S. industrial conglomerates, announced its plan to split into three independent companies. This decision came after Elliott revealed a $5 billion stake in Honeywell and pushed for the separation of its automation and aerospace businesses. The Honeywell case demonstrates Elliott’s ability to drive transformative changes in large corporations, suggesting that its proposals for Phillips 66 could similarly lead to significant improvements. As the market reacts positively to Elliott’s involvement, it is clear that many investors are hoping for a similar outcome with Phillips 66.
