Phillips 66 Stock Soars As Elliott Investment's $1B Bet Signals Major Turnaround

Phillips 66 PSX shares are trading higher following a letter from Elliott Investment Management that it has taken a $1 billion stake in the company, making it one of the largest investors. 

Elliott Investment's letter detailed the factors behind Phillips 66's underperformance and the significant value-creation potential available – potentially about 75% upside from the current stock price.

Following its 2012 spin from ConocoPhillips COP, most investors regarded Phillips 66 as a well-run and high-performing company, the letter read. 

In recent years, Phillips 66's performance has declined as it has shifted its focus away from its Refining segment, Elliott noted.

During the refining super-cycle of 2022 and 2023, Phillips 66 was not well-prepared to capitalize on the opportunities, unlike its peers Marathon Petroleum Corporation MPC and Valero Energy Corporation VLO, as per Elliott's statement.

Over the last five years, shares of MPC jumped 132.61%, VLO soared 58.12%, and PSX rose just 31.28%, according to Benzinga Pro.

"Over the past three years, as Phillips 66 has fallen further and further behind, its stock has meaningfully underperformed these peers," Elliott Investment told in the letter to the Phillips 66 board.

According to the letter, the 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.

"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," the letter read. 

"We have identified multiple highly qualified directors who we believe would provide relevant experience and expertise as the Board implements the necessary operational improvements at Phillips 66," it added.

Elliott supports Phillips 66 CEO Mark Lashier's strategy to enhance the company's performance, with Lashier aiming for $14 billion in earnings before interest, taxes, depreciation, and amortization by 2025.

If achieved, the $14 billion 2025E mid-cycle EBITDA target translates to $9 billion of free cash flow, which at a 10% free cash flow yield implies a >$205 share price.

"By contrast, we estimate that Valero trades at a ~7% free cash flow yield using comparable commodity assumptions to those underpinning Phillips 66's' target," the letter adds.

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Price Action: PSX shares are trading higher by 3.58% to $122.22 on the last check Wednesday.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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