Deal Overview
On Feb. 11, 2025, Elliott Investment Management L.P., a significant activist investor managing $69.7 billion in assets, wrote a letter to Phillips 66 (NYSE: PSX, $126.26, Market Capitalization: $51.5 billion), calling for a strategic overhaul of the Company, suggesting the sale or spin-off of its midstream business to unlock significant shareholder value of approximately $40 billion. (for more information, visit spinoffresearch.com).
The activist investor argued that Phillips 66’s inefficient conglomerate structure hinders operational efficiency and limits the true value of its assets. Furthermore, Elliott also disclosed a $2.5 billion plus stake in Phillips, which makes it one of the top five investors. However, Phillips 66 has not yet commented or acknowledged Elliott’s stake in the Company.
Elliott previously engaged with Phillips 66 in November 2023, recommending cost cutting measures and operational improvements, along with board enhancements. However, the Company’s financial performance has failed to meet expectations. Resultingly, Elliott has depicted inefficient conglomerate structure, poor operating performance, and damaged management credibility as clear reasons for underperformance. The activist has reiterated its call for a major structural shift, asking Phillips 66 to divest its midstream assets, including DCP Midstream and the recently acquired Epic NGL pipeline. Elliott believes that unlocking the full value of these assets, which currently generate over $4 billion in adjusted midcycle EBITDA, would significantly improve shareholder returns. Elliott’s “Streamline66” plan outlines that PSX could exceed $200 per share with a proper restructuring strategy.
Deal Rationale
Phillips 66 was formed in 2012 as a spin-off from ConocoPhillips, inheriting refining, midstream, and chemicals businesses. While initially positioned as a diversified energy company, its portfolio expanded through acquisitions, including DCP Midstream in 2023 and the Epic NGL pipeline in 2024. Elliott asserts that Phillips’ assets have significant scale and competitive advantages, yet the company has struggled to match its peers. Trading at a discount to its sum-of-the-parts value, Phillips 66 suffers from an inefficient conglomerate structure, weak operating performance, and damaged management credibility. Its current structure obscures asset value, leading to a valuation aligned with its lowest-multiple segment. The company is falling short of its ~$14 billion 2025 mid-cycle EBITDA target, largely due to underperformance in refining. Management’s credibility has eroded due to missed financial targets, acquisitions over portfolio simplification, and unsubstantiated turnaround claims. Despite $3.5 billion in announced divestitures and $1.5 billion in cost savings, Phillips’ stock continues to underperform industry peers. Elliott argues that without fundamental restructuring, Phillips 66 will keep lagging behind Valero and Marathon Petroleum. Refining EBITDA per barrel remains significantly lower than competitors, with a $2-$4 per barrel disadvantage. By enhancing refining efficiency and separating midstream assets, Elliott believes the company could close this gap and unlock substantial shareholder value.
Moreover, over the past decade, its total shareholder returns have trailed Valero Energy by 138% and Marathon Petroleum by 188%. The Company’s refining business, which has historically been a key earnings driver, has faced challenges in maintaining profitability. In 2024, realized refining margins per barrel fell to $6.08, compared to $13.88 in 2023, adding to the Company’s underperformance. Elliott’s “Streamline66” strategy projects that a refining EBITDA per barrel target of ~$9 could be achieved through operational improvements, bringing Phillips 66 in line with industry peers.
According to Elliot, Phillips 66’s inefficient conglomerate structure obscures the true value of its assets, preventing a clear equity story and limiting its ability to attract the right shareholder base. The Company delivers weaker capital returns than top refiners and slower growth than midstream peers, leaving investors with the worst of both worlds. Poor operating performance has further exacerbated its struggles, with refining EBITDA per barrel trailing Valero by $3.75 in 2024 and widening to $4.75 in the fourth quarter. The market remains skeptical of Phillips’ 2025 and 2027 EBITDA targets, given past unfulfilled promises, such as the failed “AdvantEdge66” initiative. Even recent $3 billion divestitures, originally intended for debt reduction or shareholder returns, were quickly offset by new acquisitions. Industry insiders have criticized Phillips for its inability to control costs, citing a management team that lacks refinery expertise and relies heavily on external consultants. Elliott believes that the lack of in house expertise has resulted in these consultants effectively running the organization and driving operational improvements on behalf of management. Investor confidence has also eroded due to persistent financial misses and a focus on acquisitions rather than portfolio simplification. The Board has consistently failed in its oversight and rewarded management with compensation misaligned with Company performance. Elliot called for enhancing oversight by adding new independent directors with refining expertise to the board and conducting a comprehensive review of the executive leadership team. This would help improve management accountability and align their incentives with the goal of maximizing shareholder value, building investor trust, addressing the persistent failed financial misses, and unlocking true Company potential by improving operational efficiency.
Elliott also pointed out that Phillips 66’s recent acquisitions of DCP Midstream and the Epic NGL pipeline strengthened the Company’s presence in the natural gas liquids (NGL) market, with mid-cycle midstream adjusted EBITDA reaching $4.5 billion. However, the activist claims that Phillips overpaid for assets, citing the EPIC NGL acquisition as an example. Although the acquisition was initially communicated as accretive based on expected future synergies, Elliott argues that the actual multiple paid was dilutive to Phillips 66’s current trading multiple. Elliott also contends that these investments have failed to generate adequate returns, as evidenced by the Company’s declining cash flow from operations, which fell from $7.03 billion in 2023 to $4.2 billion in 2024. Moreover, a standalone midstream entity, according to Elliott’s “Streamline66” framework, could trade at 10x-12x EBITDA, compared to Phillips 66’s current combined multiple of 6.6x, implying an additional $40 billion-plus in valuation potential.
Elliott emphasized that transformation at Phillips is long overdue. The Company should streamline its portfolio by selling or spinning off its midstream business, which could unlock over $40 billion in value. Elliott further suggested that Phillips 66 divest its non core Chevron Phillips Chemical (CPChem) joint venture by engaging Chevron and other potential bidders for a sale valued at approximately $15 billion. Additionally, it recommended exiting the European JET retail business, as fuel retail operations do not align with the company’s core refining strategy, through a structured divestiture process estimated at around $3 billion. These moves would sharpen Phillips’ focus on operational excellence and increase capital returns. A more focused Company can prioritize refining profitability and closing the EBITDA per barrel gap with industry leaders. Achieving this requires a comprehensive management review and adding independent directors to improve oversight. Strengthening accountability and aligning strategy with best-in-class performance would restore investor confidence. Conoco’s successful spinoff strategy a decade ago highlights the missed potential in Phillips’ current structure. While Phillips 66 management has defended itself, arguing that a diversified portfolio provides stability amid volatile energy markets, Elliott disagrees. The Company has emphasized its commitment to improving refining profitability through operational efficiencies and new technology investments, yet results have remained below expectations. Elliott believes that Phillips 66 should refocus on its refining business, mirroring the strategy successfully executed by Marathon Petroleum following its 2020 spin-off of Speedway. Since this move, led by Elliott, the stock has outperformed PSX and Valera by 178% and 120%, respectively, setting a precedent for the potential upside of a Phillips 66 midstream separation. If executed effectively, Elliott estimates that a similar restructuring could lead to a 150% plus increase in Phillips 66’s stock price.
Company Description
Phillips 66 (Parent)
Phillips 66 (NYSE: PSX) is a leading integrated downstream energy provider that manufactures, transports and markets products that drive the global economy. The Company was incorporated in Delaware in connection with the restructuring of ConocoPhillips, which separated its downstream businesses into an independent, publicly traded company named Phillips 66. The Company’s portfolio includes Midstream, Chemicals, Refining, Marketing and Specialties, and Renewable Fuels businesses. Headquartered in Houston, Phillips 66 has employees around the globe who are committed to safely and reliably providing energy and improving lives while pursuing a lower-carbon future. For FY24, the Company recorded revenues of $143.2 billion.
Midstream Segment* (Spin-off)
Phillips 66’s Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and natural gas liquids (NGL) transportation, storage, fractionation, gathering, processing and marketing services in the United States. In addition, this segment exports liquefied petroleum gas (LPG) to global markets. The Midstream segment consists of two businesses: Transportation and NGL. As of December 31, 2024, the Midstream segment owned or held partial interests in approximately 70,000 miles of crude oil, refined petroleum product, NGL and natural gas pipeline systems; 39 refined petroleum product terminals; 34 gathering and processing plants; 15 crude oil terminals; eight fractionation facilities; six NGL terminals; a petroleum coke exporting facility; and various other storage and loading facilities that are located in the United States. For FY24, the segment recorded revenues of $18.8 billion.