Highlights Need to Streamline Portfolio,
Improve Operating Performance and Enhance Oversight
Discloses a More Than $2.5 Billion Position
Full Letter and Presentation Available at
Streamline66.com
WEST
PALM BEACH, Fla., Feb. 11,
2025 /PRNewswire/ -- Elliott Investment Management
L.P. ("Elliott"), which manages funds that together have an
investment of more than $2.5 billion
in Phillips 66 (NYSE: PSX) (the "Company" or "Phillips"), today
sent a letter to the Board of Directors of Phillips 66.
In its letter, Elliott noted that when it first publicly shared
its views on the opportunities and challenges at Phillips in late
2023, investors were hopeful the Company would finally take the
necessary actions to improve its operations and realize the
significant potential of its underappreciated assets.
Unfortunately, this progress has failed to materialize, and it has
become evident that urgent changes are needed.
Specifically, Elliott noted Phillips' conglomerate structure,
poor operating performance and damaged credibility with
shareholders as factors driving the Company's underperformance. The
letter highlighted that over the past decade, Phillips' total
shareholder returns have lagged peers Valero Energy Corp. by 138%
and Marathon Petroleum by 188%, and that the Company trades at a
substantial discount to the sum of its parts.
As part of the "Streamline66" plan outlined in its letter and
attached presentation, Elliott identified three initiatives that
are needed now:
- Portfolio Simplification – A streamlined Phillips would
include the sale or spinoff of the Midstream business, the sale of
the Company's interests in CPChem and the sale of the JET retail
operations in Germany and
Austria.
- Operating Review – Phillips must commit to ambitious
refining targets that reflect best-in-class performance.
- Enhanced Oversight – New independent directors are
needed to bolster accountability and oversee a comprehensive review
of the executive leadership team.
The letter and presentation can be downloaded at
Streamline66.com.
The full text of the letter follows:
February 11, 2025
The Board of Directors
Phillips 66
2331 CityWest Boulevard
Houston, TX 77042
Dear Members of the Board:
We are writing to you on behalf of funds managed by Elliott
Investment Management L.P. (together with such funds, "Elliott" or
"we"). We have an investment of more than $2.5 billion in Phillips 66 (the "Company" or
"Phillips"), making us one of your top five investors.
As you know, this is not the first time we have publicly shared
our views on Phillips' opportunities and challenges. In November of
2023, we published a letter to the Board noting the Company's
ambitious targets in the areas of operational improvement,
portfolio-streamlining and improved capital return to shareholders.
To repair Phillips' damaged credibility with investors and ensure
the right oversight and accountability, we called for collaboration
on the addition of two new directors with refining-operation
experience. And if Phillips failed to show material progress, we
suggested an alternative path similar to the one taken by Marathon
Petroleum ("Marathon") following our engagement there in 2019. In
that situation, board and management enhancements led to
operational improvement, portfolio-rationalization and significant
long-term share-price outperformance. Since our engagement,
Marathon's total shareholder return has outperformed Valero Energy
Corp. ("Valero") by 120% and Phillips by 178%.1
The 2023 publication of these views put a spotlight on the
significant opportunity present at Phillips and initially sparked
market optimism for a long-overdue turnaround at the Company.
Unfortunately for investors, patience has been punished.
As detailed in the enclosed presentation, available at
Streamline66.com, Phillips has failed to make meaningful
progress on its targets. It abandoned serious collaboration on
Board and corporate governance improvements by failing to honor its
commitment to add a second director and reverting to a combined
CEO-Chairman role. And despite possessing valuable assets and a
clear, achievable path to realizing their full potential, Phillips'
total shareholder return has continued to disappoint, lagging well
behind peers. Over the past decade, Phillips has underperformed
Valero by 138% and Marathon by 188%.2
This experience has been frustrating but has clarified the scale
of the problem and reinforced the urgent need for the Company to
pursue an alternative path, namely (i) an overhaul of the Company's
conglomerate structure, (ii) demonstrable improvements in its
operating performance and (iii) a refresh of the Board and
executive team.
We remain committed, engaged investors in Phillips due to our
conviction in the significant opportunity for value creation
represented by the quality of the Company's assets. These
underappreciated assets benefit from significant scale and strong
competitive positioning across the Company's businesses. In
addition to its core refining business, Phillips has a highly
valuable midstream business focused on the NGL value chain and a
world-class chemicals joint venture.
However, Phillips today trades at a substantial discount to a
sum-of-its-parts valuation, and investors have plainly lost
confidence in the Company's ability to unlock this value under its
current structure.
We believe the factors driving this underperformance are
clear:
- Conglomerate Structure: Phillips' inefficient structure
obscures the true value of its assets. Within a single
conglomerate, the Company's disparate businesses lack a natural
shareholder base and a coherent equity story. Phillips delivers
weaker capital returns than leading refiners and slower growth than
midstream peers, resulting in the worst of both worlds for
investors. This structure hinders management's ability to focus on
the unique needs of each business, weakening its ability to drive
operational excellence.
- Poor Operating Performance: Phillips has repeatedly
failed to meet key targets. The Company's 2024 refining EBITDA per
barrel has trailed best-in-class peer Valero by $3.75 per barrel, widening to a $4.75 per barrel shortfall in the most recent
fourth quarter.3 Former employees and other industry
executives have described Phillips as a company unable to control
costs or stay commercially competitive, citing a management team
and Board that continue to lack refinery operating experience and
have outsourced key operational initiatives to management
consultants.
- Damaged Credibility: Persistent financial misses and the
pursuit of acquisitions instead of portfolio simplification have
eroded investor confidence in management. The market still does not
appear to take this leadership team's 2025 and new 2027 mid-cycle
EBITDA targets seriously. Worse, the management team's continuous
claims of a successful turnaround without corresponding tangible
financial results have further eroded its credibility. Long-term
shareholders recall the 2019 Analyst Day "AdvantEdge66," where
management's claims fell far short of Phillips' actual operating
performance. Even the Company's recent $3
billion in promised divestitures, initially earmarked for
shareholder returns or debt reduction, was immediately redeployed
into a near equivalent amount of new acquisitions. The Board has
repeatedly failed in its fundamental oversight duties, rewarding
management with compensation disconnected from the Company's
performance.
As detailed in our "Streamline66" presentation, we believe
Phillips can resolve these issues through decisive action. Another
year of empty rhetoric and broken promises is unacceptable. We
believe that Phillips must pursue the following initiatives without
delay:
- Streamline Portfolio – Phillips' world-class
midstream business should be sold or spun off, as we believe it
could command a premium valuation in excess of $40 billion.4 This standout business
should separate from a corporate structure that both diminishes and
obscures its value. Phillips should also sell its interest in
CPChem, an asset that we believe would likely attract significant
interest from its existing JV partner or other potential buyers.
The Company should execute on the frequently discussed sale of its
JET retail operations in Germany
and Austria. Divesting non-core
assets, such as CPChem and select European retail operations, would
allow Phillips to increase capital returns to its shareholders and
sharpen its focus on operational excellence within its core
business.
- Operating Review – A more focused Phillips can
better prioritize refining profitability. The Company should commit
to ambitious refining targets that reflect best-in-class
performance. We reaffirm our November
2023 call for Phillips to close the EBITDA-per-barrel gap
with its peers, a gap that has actually widened since our initial
engagement with the Company.
- Enhanced Oversight – Meeting operational targets
requires a comprehensive review of the Company's management team.
In addition, fresh perspectives on the Board would strengthen this
leadership evaluation. Phillips should add new independent
directors to bolster accountability and improve oversight of
management initiatives.
Taken together, this plan offers a pathway for restored investor
credibility and a realization of the full value of the Company's
attractive asset base, which is currently obscured by its
conglomerate structure. More than a decade ago, after spinning out
its refining and midstream assets, Conoco became a purpose-built
upstream business that has flourished. The mix of assets that
became Phillips in 2012 has since lacked cohesion, limiting the
potential of its disparate businesses. A transformation of Phillips
is long overdue.
The past year has provided strong evidence that change is
needed. In our November 2023 letter,
we wrote, "At present, we believe [CEO Mark] Lashier and the rest of the management
team deserve investor support so long as they demonstrate
meaningful progress against [their financial] targets." Since then,
Phillips has failed to do so. As such, investor support has
evaporated. The Board and management team must now recognize the
severity of their credibility crisis and seize the opportunity to
address it by pursuing the initiatives outlined above.
Sincerely,
John Pike
Partner
Mike Tomkins
Senior Portfolio Manager
About Elliott
Elliott Investment Management L.P. (together with its
affiliates, "Elliott") manages approximately $69.7 billion of assets as of June 30, 2024. Founded in 1977, it is one of the
oldest funds under continuous management. The Elliott funds'
investors include pension plans, sovereign wealth funds,
endowments, foundations, funds-of-funds, high net worth individuals
and families, and employees of the firm.
1 Bloomberg, from 9/24/2019 (the day prior to Elliott's public
presentation) to 2/7/2025
2 Bloomberg, as of 2/7/2025
3 Company filings, Q4 2024 earnings, see analysis in
enclosed presentation
4 See analysis in enclosed presentation
Contact:
Casey Friedman
Elliott Investment Management L.P.
(212) 478-1780
cFriedman@elliottmgmt.com
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SOURCE Elliott Investment Management L.P.
