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Phillips 66 Co. has expressed confidence in its current leadership after a group of investors called for new names in the board of directors to remedy “underperformance”.
In a letter to the Phillips 66 board of directors Elliott Investment Management LP called for the addition of two new names to the board saying they have the refining operations expertise to improve the company’s below-peers performance in this segment.
Elliott, which disclosed an investment of about $1 billion in Phillips 66, rued the company’s shifting of focus away from the refining sector in recent years. “As a result, operational execution has suffered, and the Company was poorly positioned to take advantage of the refining super-cycle in 2022 and 2023”, it said in the letter. “During this transformative period, peers such as Marathon Petroleum and Valero Energy were far better prepared”.
“Over the past three years, as Phillips 66 has fallen further and further behind, its stock has meaningfully underperformed these peers”, New York-based Elliott added, blaming underperformance in refining and poor execution of cost-reduction strategies.
Citing as proof of Phillips 66’s loss of focus in the refining sector, Elliott said the company’s refining operating expense per barrel, a metric by which investors compare operating efficiency between rivals, has been declining.
By 2022, the gap between Phillips 66’s opex with that of Valero Energy Corp. grew to about $2.3 per barrel, up $0.95 per barrel compared to the 2013–19 average, according to Elliott.
In contrast, Marathon Petroleum Corp. narrowed its opex gap to Valero to within around $0.3 per barrel, representing a decrease of approximately $1.10 per barrel versus their average gap in the prior seven-year period, the letter noted.
“We believe this lack of opex discipline has been a key driver of the Company’s stock-price underperformance, particularly in the context of the substantial improvements made by its similarly situated peer Marathon”, it stated. “Achieving safe, reliable and efficient refining operations is paramount to reversing Phillips 66’s underperformance”.
Additionally in contrast to its goal of reducing costs, Phillips 66, which has been led by chief executive Mark Lashier since July 2022, saw costs climb relative to peers following the enforcement of a cost-reduction program 2019, Elliott said.
“These results have rightfully led investors to dismiss the Company’s subsequent targets – not based on their estimation of the opportunity, but on their estimation of the management team’s ability to achieve its stated goals”, Elliott said.
It agreed with targets set by the Lashier-led management team that included the generation of $14 billion in mid-cycle EBITDA by 2025, with over $1 billion in improvement from refining; the sale of $3 billion in non-core assets; and an increase in long-term capital returns.
However, Elliott warned skepticism about the leadership’s ability to execute has weighed down on the company’s stocks.
It went on to suggest, “Given the Company’s history of failed execution, we believe shareholders would welcome the appointment to the Board of two new directors with refining-operating experience”.
“We are hopeful the current management team, supported by an enhanced Board, can deliver on its performance targets and achieve significant stock-price outperformance”, Elliott added. “However, should Phillips 66 fail to show material progress toward its 2025 targets over the next year, we believe that the Company should at that point pursue its best available option by making a strategic pivot and following a path that mirrors Marathon’s recent transformation”.
In a statement Phillips 66 replied, “We agree with Elliott that successful execution of our strategic priorities will drive substantial stock price performance”.
But the company said it believes it has “the right management team and Board in place to deliver long-term, sustainable value”.
Phillips 66 added it has made “substantial progress” toward its strategic targets
It plans to continue “constructive dialogue” with Elliott, the statement said.
To contact the author, email jov.onsat@rigzone.com
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