Elliott Faces First-Ever US Proxy Vote in Phillips 66 Battle

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The result will alter the trajectory of Phillips 66, either giving its executives license to continue down their path of further integration, or backing Elliott’s mandate of divestments and a return to the company’s refining roots.

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Phillips 66, with a roughly $50 billion market valuation that makes it one of the most valuable US independent refiners, has touted its integrated business model as a safeguard against fluctuations in the refining margin cycle. 

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“That’s our competitive edge,” Lashier told Bloomberg Television in an April interview. It’s a message the refiner has been keen to drive home, mentioning its integrated refining strategy 12 times on its earnings call last month, including four times in a 1,700-word answer Lashier gave to an analyst’s question about Elliott.

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Elliott wants the company to become what’s known as a pure-play refiner, unencumbered by non-core assets like gas stations and pipelines. When it ran a campaign against Phillips 66 rival Marathon Petroleum in 2019, Elliott successfully pushed for the $21 billion sale of that company’s Speedway retail operations, with the proceeds ultimately used to fund share buybacks. 

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Over the last five years, Phillips 66’s shares have climbed about 56%, compared to almost 100% for Valero and more than 340% for Marathon.

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One problem for Phillips 66’s pitch is that its integrated system hasn’t been a benefit in recent economic downturns, where it underperformed Marathon and Valero, according to a Bank of America Corp. analysis. As Elliott’s proxy battle has progressed from slide decks to press releases and even podcasts, there’s been little for Phillips 66 to fall back on. 

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The Houston-based refiner did announce the sale of a stake in its German and Austrian retail business last week for about $1.6 billion. But the value of about 970 gas stations pales in comparison to the $40 billion-plus of cash that Elliott thinks the refiner could generate by selling or spinning off its midstream business. 

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Also on the chopping block if Elliott wins could be a chemicals joint venture with Chevron Corp. Elliott values Phillips 66’s stake in the joint venture at about $13 billion and Chevron has told the refiner it is interested in a buyout.

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“We think that those assets are so valuable that it would be difficult for any competitor to come up with cash to meet our expectations” CEO Lashier told Bloomberg.

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Proxy advisers, who issue in-depth reports to help shareholders decide how to vote, have been supportive of Elliott’s candidates and could hand the activist investor an advantage. 

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Institutional Shareholder Services Inc. and Egan-Jones both recommended that Phillips 66 shareholders vote for all four activist nominees, though ISS said it wasn’t endorsing Elliott’s calls for a spinoff or sale of Phillips 66’s midstream and chemicals assets. Glass Lewis endorsed three of Elliott’s nominees. 

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Phillips 66 “has established a track record of providing selective and ambiguous disclosure that obfuscates results, makes it difficult to assess decisions, and creates impediments to evaluating performance,” ISS wrote in its report.

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Phillips 66 quickly issued a statement disagreeing with Glass Lewis and ISS’s recommendations, a move that makes a settlement increasingly unlikely.

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Public Fight

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Established almost half a century ago by Paul Singer, Elliott usually agitates for change behind the scenes. But this campaign has been conducted largely in public after Phillips 66, in Elliott’s view, avoided engaging with the activist. Lashier said the company had met with Elliott almost 30 times over the past 18 months. A proxy filing shows that several meetings took place during the period that related to board candidates.