The Scoop
A boardroom fight is brewing in Texas, pitting a struggling industrial conglomerate against America’s most powerful hedge fund.
Elliott Management has amassed a formidable reputation as an activist investor over the last 30 years. Swashbuckling in its earliest days, it has since sanded its rougher edges, winning credibility with other investors — and the occasional corporate executive — for boardroom turnarounds.
Elliott’s latest target is Phillips 66, whose shares it argues are weighted down by a pipeline business that it should sell or spin. Elliott has named seven potential candidates for Phillips 66’s board, but hasn’t yet finalized its slate to run for election at the company’s annual meeting in May.
On Thursday, the activist sent a letter to investors chastising Phillips 66 CEO Mark Lashier’s apparent double-speak on the company’s valuation. Elliott believes the company trades below the combined value of the individual businesses, but highlighted recent comments from Lashier which suggest he has talked down the company’s stock — an unusual thing for a CEO to do.
“In a somewhat surprising tactic, PSX management talked down the potential [sum-of-the- parts] upside,” Piper Sandler analysts wrote of their conversation with Lashier in an analyst note earlier this month. The analysts said Lashier communicated that he believes the stock is “fairly valued.”
That midstream business, which includes facilities across Louisiana and Texas, could be worth almost the entire current market valuation of the company, Elliott says, and leave a leaner company focused purely on being a chemical refiner, an industry that tends to be more richly valued by investors.
Phillips 66 is bulking up its leave-us-alone case, on Wednesday saying it would add two blue-chip corporate veterans to its board: former Chevron executive Nigel Hearne and Howard Ungerleider, who as Dow’s CFO, was an architect of the company’s merge-and-spin maneuver.
Phillips has accused Elliott of bad faith engagement in corporate filings: swinging from regular, relatively collaborative dialogue in 2023 to radio silence before launching a public campaign.
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Rohan’s view
Phillips 66’s argument — that the company’s disparate businesses are worth more together than apart — is out of fashion in today’s business world. Investors don’t need corporate managers to build diversified portfolios for them, and tend to put a discount on sprawling operations on the theory they’re too hard to manage.
Industrial giants 3M, GE, and Honeywell, and media companies including Comcast and Warner Bros. Discovery have already wholly or partially dismantled themselves. Marathon, which Elliott pushed to break up six years ago, embarked on a similar restructuring and has seen its stock richly rewarded.
The company’s shares have badly lagged the S&P 500 Energy index over the last year, though they have almost doubled the index since Lashier took over as CEO.
Elliott may have the right idea here, but there are questions about timing and logistics. Phillips 66’s equipment is older and less productive than that of its closest competitor in the space, Valero, making a pure comparison difficult. Selling its midstream business isn’t an obviously easy move. And Phillips 66 executives don’t think they could attract buyers for that business at an acceptable price, according to people close to the company.
Phillips’ most marketable asset is its stake in a 50-50 chemical joint venture with Chevron. Both companies have expressed interest in buying or selling to each other over the years, but neither side have lately held meaningful discussions about it, people close to Phillips said. It’s a dance that has been going for the last decade, given that when chemical businesses are doing well, the cost of buying the other side out is too high, while when the business is at a low point, the price is too low.
In the short term, however, Elliott’s argument for partial board refreshment and governance improvements carries some water. Meanwhile, Lashier’s negative talk seems to be having an impact. Goldman Sachs downgraded Phillips 66 this morning, writing that it saw “limited” sum-of-the-parts upside to the stock.
The View From Mark Lashier
Lashier has defended the conglomerate model repeatedly.
“The core competencies of Phillips 66 are our ability to gather, process and turn hydrocarbons into things that people use every day,” Lashier said at an energy conference earlier this month. “I think that is the beauty of the assets we have, the integration that we have. Wherever the margin is showing up in those value chains we can capture that and deliver value back to our shareholders.”