Activist hedge fund Elliott Investment Management has purchased a $1bn stake in US refiner Phillips 66's and is calling for the company to refocus on its refining business and reduce operating costs.
In a letter sent to Phillips 66's board of directors, Elliott said the company has underperformed compared to its peers Valero and Marathon Petroleum, which were better prepared to take advantage of the "refining super-cycle in 2022 and 2023".
US refiners reported historically wide margins in the past year as demand recovered to pre-pandemic levels and as much as 1mn b/d of US refinery capacity closures constrained supply.
Phillips 66's operating expense per barrel of crude — a proxy for operating efficiency at a refinery — has spiked since 2019 compared to its industry peers, Elliott said in its letter. The investor believes analysts have lost confidence in the company's ability to cut expenses after it announced a cost reduction program in 2019 and expenses subsequently rose.
The refiner is already planning $3bn in asset sales and announced in earnings last month that it was accelerating its target for cost reductions to $1.4bn by year-end 2024, with over 50pc in the savings coming from its refining business. Phillips 66 earlier this year also announced plans to cut 275 office workers, first reported in August by Argus.
The activist investor has called for Phillips 66's board to appoint two new directors with experience in refinery operations, an area it believes the current board has limited expertise in.
Elliott now has an approximately 1.9pc stake in Phillips 66 based on its closing market cap on 28 November. It is unclear over what period of time Elliott acquired its stake in the company.
Phillips 66's chief executive Mark Lashier said today the company has "... engaged in discussions with Elliott Management, and we welcome their perspectives and the perspectives of other shareholders on our strategy and the actions we are taking to drive long-term sustainable growth and value creation."
Elliott has previously targeted Canadian integrated oil company Suncor, pushing for board changes and for the company to divest its 1,500 retail stores, which Suncor ultimately did not do.
Marathon, however, agreed to sell it's 3,900 store Speedway retail network in 2019 following pressure from Elliott, which held about 2.5pc of Marathon's stock, and criticized the refiner's integrated downstream business model.
Midstream vs refining amid mega-mergers
Should Phillips 66 fail to make sufficient progress towards its cost cutting goals, Elliott will push for management changes and a sale of the company's stake in Chevron Phillips Chemical's — valued at about $15bn-20bn after taxes by the investor — and its European convenience stores and other midstream assets, the fund said in today's letter.
But Lashier said the company intends to grow its midstream business.
"We are a midstream company that takes away primarily natural gas liquids from [the Permian] basin … and we intend to get bigger in that business," he said last month during an event at Rice University's Baker Institute for Public Policy in Houston, Texas.
"We are going to make sure that we're positioned to be a great service provider for Exxon and all their peers in the Permian," following ExxonMobil's $60bn acquisition of Pioneer Natural Resources and Chevron's $53bn acquisition of Hess, Lashier said.
ExxonMobil's Permian output will more than double to 1.3mn b/d of oil equivalent (boe/d) when the acquisition closes in 2024, before increasing to about 2mn boe/d in 2027.
