Love Letters Part 1 – Big Oil Gets Tough Love From Investor Elliott Management
Elliott Management, a private investment firm owning a $2.5 billion stake in Phillips 66 (PSX) stock, published a critique of PSX’s structure, performance, and management in the form of a February 11, 2025 open letter to the PSX board of directors that includes a presentation detailing Elliott’s assessment of the company and stating that Phillips 66’s inefficient conglomerate structure, poor operating performance and damaged management credibility have caused deep under-performance of the company and its stock.
In the package, Elliott gives recommendations on how to drive the stock price from $120 per share to $200 per share. In today’s first episode of “Love Letters”, I summarize Elliott’s tough love approach with PSX and other downstream oil companies in which they have invested.
Elliott claims the current PSX conglomerate structure, consisting of refining, midstream, marketing, and chemicals segments, is inefficient and obscures the underlying value of its assets. This structural weakness is blocking realization of the value of the midstream market segment, which Elliott wants to sell as part of a “streamlined portfolio” strategy to unlock value not currently recognized in the stock price.
Elliott claims the PSX Midstream segment’s value is obscured by the market’s perception of PSX as a refining company. Graphic evidence for this claim appears in Figure 1, an excerpt from the Elliot presentation, showing how the PSX stock price (red) has moved down in tandem with its refining peers (green) since March of 2024, while its midstream peers (blue) have been climbing.
Elliott estimates that unlocking the PSX midstream segment’s market value would alone increase the stock price by $36/share. The simplified portfolio strategy also recommends pursuing sale or spinoff of PSX’s share of its CPChem chemicals business partnership with Chevron, and execution of the planned sales of its European jet retail businesses.
A second pillar of the Elliott strategy for PSX is to review operational performance with emphasis on increasing refining margins. PSX’s refining margins have consistently lagged competitor Valero Energy (VLO)’s margins over the last five years by around $3 per barrel which accounts for most of the failure to achieve earnings targets. The presentation does not diagnose the chronic under-performance of PSX’s Refining segment or identify specific steps to improve operational performance. It does criticize management’s claims of refining cost reductions as “Illusory “ and as “straw man benefits” rather than genuine cost reductions – and points to low refining experience among management and over reliance on consultants historically favored by PSX’s Chemicals business segment, as weaknesses contributing to this under-performance.
The presentation does not diagnose the chronic under-performance of PSX’s Refining segment or identify specific steps to improve operational performance.
The third pillar is to bring in new directors and evaluate company leadership. Elliott says the current leadership continues to fall short in meeting stated earnings targets and continues to falsely blame those shortfalls on the market environment. Capital investment projects have overrun their budgets and under-performed versus expectations. For example, the “Rodeo Renewed” capital investment project that converted the PSX Rodeo California refinery to renewable diesel production ended up costing $1.25 billion versus the originally budgeted $850 million (more on this in the next episode of Love Letters). Elliott says the current management has lost credibility with investors and new leadership is needed to increase performance, oversight, and accountability.
Phillips 66 is not alone in bearing blistering criticism from shareholder Elliott.
Starting in 2016, Elliott established a 2.5% stake in Marathon Petroleum Corp (MPC) stock and engaged the MPC board and Leadership on strategies to improve bottom line performance. Elliott was pushing to separate MPC into refining, midstream, and retail companies and otherwise overhaul the company in a strategy headlined by the separation of their Speedway retail fuels unit. After 3 years of collaborative efforts, in September 2019, Elliott sent an open letter and presentation to Marathon’s board (just as they have now done with Phillips), recommending changes to remedy Marathon’s chronic under-performance, improve their businesses and unlock sustainable value for its shareholders. The 2019 Marathon letter rebuked management for “disingenuous actions” by doubling down” during the supposed collaboration phase as follows:
“Unbeknownst to us at the time, while the Company’s management team was purportedly giving a Speedway separation a “full and thorough review,” it was in fact already far along in discussions to acquire Andeavor, another integrated refining conglomerate. Thus, while Marathon executives were telling investors that they were taking a critical look at their structure, they were in fact already contemplating and in the process of executing a massive recommitment to their failed conglomerate model, as detailed in the merger proxy for the Andeavor transaction.” — Elliott Management to Marathon Petroleum Corp., September 25, 2019
Elliott’s intervention eventually led to a remake of Marathon Petroleum featuring the sale of their Speedway retail marketing unit, board and executive leadership changes, a multi-year stock buyback program, and modernization of corporate governance.
In their February 11, 2025 letter to PSX, Elliott points to a standout 322% total shareholder return for MPC since Elliott’s 2019 engagement (far exceeding their original upside projections for MPC), as a benchmark. Elliott suggests that PSX, by following MPC’s lead – that is, by spinning off non-core assets, improving refining operational performance, and unlocking obscured value from its current conglomerate structure, can lift PSX’s stock by 65%, with a 150% “full potential” upside.
In another case, following what is now recognizable as a familiar script, on April 8, 2022, Elliott sent an open letter and presentation to Canadian oil company Suncor’s board of directors for the purpose of informing them of Elliott’s views on the right path forward for Suncor. A noteworthy excerpt from that Suncor letter says:
“Our research suggests that missed production goals, high costs, and, tragically, a number of employee fatalities and other safety incidents, all find their roots in a slow-moving, overly bureaucratic corporate culture that appears to have lost the dynamism that not long ago made Suncor the most valuable energy company in Canada. Regaining that dynamic, high-performing culture will require decisive, immediate action from the Company’s leadership and a willingness to commit to a new path.” -Elliott Management to Suncor, April 8, 2022
Elliott’s formula seems to be as follows: First, establish a position among the top few investors in the company. Second, engage company leadership in a challenging, “tough love” partnership to hopefully collaborate on change. Third, if collaboration fails, go public with letters containing blunt recommendations to overhaul the company supported by detailed analysis of performance failures and withering criticism of company leadership.
They present a compelling case this has been a successful formula. In the February 2025 PSX presentation, Elliott refers to today’s Suncor as a “best-in-class company” who sets targets that show up in bottom line financial performance with sufficient disclosure to track progress and drive accountability, and they show hard data to support this assessment. In all cases, the analysis provided by Elliott appears well-informed, rigorous and quantitative compared to what is typically seen, at least in public, by refining industry investors.
Elliott’s formula seems to be as follows: First, establish a position among the top few investors in the company. Second, engage company leadership in a challenging, “tough love” partnership to hopefully collaborate on change. Third, if collaboration fails, go public with letters containing blunt recommendations to overhaul the company supported by detailed analysis of performance failures and withering criticism of company leadership.
According to news reports, Elliott has now established a nearly 5% stake in BP, and the February 26 BP Capital Markets Day is expected to be a critical event. BP stock jumped 10% in the last 2 weeks, including 7% the day Elliott’s BP involvement was announced (the same day they issued the PSX “love letter”).
In its February 11, 2025 quarterly earnings conference call, BP Chief Executive Officer Murray Auchincloss set the stage for the February 26 meeting by saying:
“In two weeks’ time, we will build on the actions taken in the last 12 months and provide a comprehensive update at our Capital Markets event. It will be a fundamental reset of our strategy. It will demonstrate our focus on actions to drive performance, and it will enable us to grow cash flow and returns and shareholder value.” –Murray Auchincloss, BP CEO, February 11, 2025
That indeed sounds like a fundamental shift for BP. It sounds responsive to the kind of influence Elliott is known to exert, and BP management is probably well-prepared for the likelihood Elliott will respond strongly to any surprise resets that don’t align with shareholder interests.
Stay tuned for more episodes of “Love Letters”.
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