IN-DEPTH: Not a drill - Elliott set for rare vote at Phillips 66
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Elliott Management’s push for four seats on the board of U.S. oil major Phillips 66 looks increasingly likely to go all the way to a shareholder vote on May 21, a relatively rare experience for the activist, which has made a habit of settling thanks to its reputation.
As of May 14, 83 days had passed since 5.7% stakeholder Elliott initiated its board representation demand at Phillips 66, naming a “highly qualified” slate in a regulatory filing.
According to Diligent Market Intelligence (DMI) data, it took an average of 36 days for Elliott to gain board representation via a formal settlement in 2024 and 44 days the year before.
Southwest Airlines, Match Group and Goodyear Tire and Rubber were among the companies to settle with Elliott in that time, with Phillips 66 itself finding terms with the activist in early 2024 to add an Elliott-backed director to its board.
Indeed, absent an eleventh-hour agreement with Phillips 66 in this its latest campaign, DMI data show that any gain board representation demand going the whole way to a vote would be Elliott’s first in recent years with all such resolved board demands ending in a settlement in the three-year period from 2022 to 2024 with a total of 13 agreements inked at U.S.-based targets and 16 globally. In the U.S., the activist has demonstrated a pattern of settling days before a vote when victory was all but secure, as evidenced at Hess in 2013 and at Arconic in 2017.
Multiyear campaign comes to a head
Elliott Management launched its campaign in November 2023 with a call for Phillips 66 to add two board seats as part of an effort to address perceived underperformance relative to peers such as Valero Energy and Marathon Petroleum.
Elliott enjoyed partial success last year with the addition of oil industry veteran Bob Pease to the company’s board ahead of the company carrying out asset sales to the tune of $2.7 billion.
But Elliott announced in February this year that it had more than doubled its holding to around $2.5 billion and called on the company to consider ditching its midstream operations, which for oil and gas companies typically refers to operations such as transportation and storage. Phillips 66 describes its midstream operations as including transportation, storage, and marketing for crude oil and natural gas, adding that they are “highly integrated” with its downstream refining and retail operations.
In March, Elliott revealed that it would be seeking “at least” four board seats, naming a provisional slate of seven and complaining that the company had ignored requests for it to add a second new board member.
Phillips 66 has strongly disagreed with Elliott’s ideas; dismissing the activist’s slate as “redundant” and accusing it of trying to break up the company with its insistence on midstream divestments.
The verdicts
The activist has been firm in its belief that its nominees will add “decades of experience” in refining and midstream operations. By May 12, it had won proxy advisor backing that echoed many of the talking points it made about governance and performance since launching its latest board bid, with Institutional Shareholder Services (ISS) reportedly taking aim at the company for its alleged “defensive” and evasive statements during the subsequent to-and-fro.
ISS endorsed all four Elliott candidates, one more than Glass Lewis, which also took the activist’s side on “matters of cost management, synergy value and capital allocation.”
Research conducted by DMI for our recent Shareholder Activism Annual Review found that while companies can in some cases overcome negative ISS verdicts, obtaining the support of both proxy advisory firms is considered critical to any board seat win for a pursuing activist.
Phillips 66 hit back on May 13 arguing that it “strongly disagrees” with ISS and Glass Lewis, accusing both of glossing over Elliott’s divestment demands and of playing down or ignoring what it views as Elliott’s “misleading disclosures and the overlapping relationships of its director nominees.”
Phillips 66 has reminded shareholders that the management slate includes not only last year’s addition Pease, but also Nigel Hearne, a former Chevron executive vice president who is now Harbour Energy’s chief operating officer.
Shareholders might wonder why Elliott is highlighting candidates’ experience in midstream operations: after all, the activist says it wants divestments from this area. On the other hand, ISS has backed the activist’s slate as bringing “focused experience in refining and midstream operations” and potentially “valuable perspective” should Phillips 66 opt for “a separation of the midstream segment." Elliott has in the meantime come full circle with its latest May 6 presentation to shareholders. Echoing its very first statement on the company issued in late 2023, the activist lamented Phillips 66’s “underperformance” relative to industry rivals Valero and Marathon, claiming that the latter’s outperforming of Phillips 66 was down in large part to it adopting Elliott’s recommendations. Marathon followed Elliott’s line with the 2020 divestment of its Japan-based fuel retail business and Elliott has pushed to see Phillips 66 do the same with its retailing in Austria and Germany and on Thursday this week, the company struck a deal with investment firms Energy Equation Partners and Stonepeak.
Whatever the outcome of next week's highly anticipated vote, Elliott is adamant that it is not going anywhere until it achieves its objectives as was noted by Elliott Partner John Pike, who runs the activist's global energy practice and is leading the Phillips 66 investment. "On the one hand, there is a lot of change that is required to unlock the value and then it takes some time for the markets to put that value into the stock. So we plan on being here for quite some time," Pike said on episode four of the activist's Steamline66 podcast. "We only win if all shareholders win. Short-term fixes or changes literally do nothing for us. We need this to be fixed and for it to work and for it to work over a multi-year period. So that is our overarching goal."
