Activist investor Elliott Capital Management is pushing Phillips 66 (PSX) to sell or spin off its midstream business鈥攚ith the firm saying a sale could generate in the neighborhood of $45 billion for shareholders.
The value of a sale would depend on what premium a buyer is willing to pay for infrastructure that includes gathering and processing in the Midland, Delaware and Denver-Julesburg (D-J) basins, along with long-haul pipelines connecting the Permian and D-J to the Gulf Coast. Phillips 66鈥檚 midstream assets include pipeline systems, fractionation capacity and gas processing.
Likewise, a Phillips 66 midstream spin-off could command a $40 billion total enterprise value, with a share uplift for PSX ranging from $24 to $54, according to Elliott. TD Cowen analysts said the midstream assets market valuation would likely be near that of industry peers such as ONEOK, which has a market cap of about $58 billion.
In a Feb. 11 letter to Phillips 66鈥檚 board, Elliott disclosed it has taken a $2.5 billion stake in the company, 鈥渕aking us one of your top five investors.鈥� The letter sets out a case for streamlining the company through changes in its structure and governance. The firm also launched a website called Streamline66.com to promote its goals.
鈥淧hillips today trades at a substantial discount to a sum-of-its-parts valuation, and investors have plainly lost confidence in the company鈥檚 ability to unlock this value under its current structure,鈥� the letter said.
Part of Elliott鈥檚 discomfit is related to multiple midstream acquisitions made by Phillips 66, including January鈥檚 $2.2 billion deal for EPIC鈥檚 Y-Grade Texas NGL assets. In 2024, PSX paid $550 million for Midland Basin gas and processing assets. And in 2023, the company bought various midstream assets from DCP Midstream for $3.8 billion.
Elliott said the acquisitions are part of the problem, both financially and in terms of the company鈥檚 credibility.
鈥淚nvestors were excited about management鈥檚 divestiture program; but rather than retiring debt and increasing capital returns with proceeds, Phillips bought more midstream assets,鈥� Elliott said in a presentation outlining its demands.
The company鈥檚 鈥渞ecent $3 billion in promised divestitures, initially earmarked for shareholder returns or debt reduction, was immediately redeployed into a near equivalent amount of new acquisitions.鈥�
RELATED
ArcLight Completes $865MM Deal for Phillips 66鈥檚 Stake in NatGas Line
However, Elliott also pointed out the value of the midstream infrastructure Phillips has bought, noting that its largest share of EBITDA comes from midstream (38%) with the next largest in refining (29%). The midstream assets also have a vertically integrated wellhead-to-water NGL business across the Permian and D-J that generates stable cash flow, according to Elliott.
RELATED
Phillips 66鈥檚 NGL Focus, Midstream Acquisitions Pay Off in 2024
The activist firm said Phillips has also lost credibility on capital allocation with the company overpaying for assets.
鈥淧hillips stretches when communicating multiples on acquisitions to sell transactions to the market as more accretive, and has been unable to deploy organic growth capital within budget,鈥� according to an Elliott presentation.
Analysts see merit
TD Cowen analyst Jason Gabelman said strong valuations鈥攁nd the ability for a standalone PSX midstream company to better capture growth opportunities鈥攎ake a midstream spin-off or sale appealing.
He noted that the midstream sector has outperformed the rest of energy since the beginning of 2023, with the Alerian Midstream index rising by 52% compared to the Energy Select Sector SPDR Fund, or XLE, which is up 3.5%.
Phillips鈥� conglomerate structure, which Elliott criticized in its letter, includes refining, which Gabelman said has lagged despite accomplishing several operational targets including opex, availability and clean yield.
The company鈥檚 refining segment has had the most negative surprise to investors, Gabelman said. 鈥淢oreover, differentiated Chemicals exposure has been a headwind due to the macro environment rather than anything PSX-specific.鈥�
TPH & Co. analyst Matthew Blair, writing in a Feb. 11 report on refiners, noted that Phillips 66 finished last on margins. Valero Energy Corp. 鈥渞e-took the crown as [the] most profitable large-cap refiner (and almost certainly most profitable independent refiner) in 2024 with refining EBITDA of $5.98/bbl, edging out [Marathon Petroleum Corp.] MPC (last year鈥檚 #1) at $5.33/bbl and well ahead of PSX at $2.13/bbl,鈥� Blair said.
Gabelman posited that a sale/spinoff of Phillips鈥� midstream segment would leave the remaining Phillips 66 鈥淧arentCo鈥� with more volatile earnings.
鈥淲e suspect PSX would retain some midstream assets core to the refining and chemicals business, he said. 鈥淭here is a question of how much synergy value exists from an integrated midstream business, which we will seek to evaluate.鈥�
However, Gabelman mused on a different path, in which PSX could 鈥渟hrink its refining business to eliminate weaker assets and improve the valuation multiple as midstream becomes a bigger part of the business.鈥�
Elliott also called on Phillips to also sell its interests in its joint venture (JV), Chevron Phillips Chemical Co. (CPChem), saying the asset would likely attract significant interest from its JV partner or other potential buyers.
The company should also execute on the frequently discussed sale of its JET retail operations in Germany and Austria.
鈥淒ivesting 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,鈥� Elliott鈥檚 letter said.
Finally, the company 鈥渟hould add new independent directors to bolster accountability and improve oversight of management initiatives,鈥� the letter said.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you鈥檙e experiencing any technical problems, please contact our customer care team.