PSX Turnaround: Pipeline to a Rerating.

Erik@YWR on Phillips 66 (PSX-USA | phillips66ps)

4/13/2025

Summary

Phillips 66 (NYSE: PSX) is trading at $97 per share, with a market capitalization of ~$40 billion. Despite owning one of the most valuable midstream networks in the country, alongside high-quality refining, chemicals, and marketing operations, the company trades at a significant discount to its intrinsic value. Activist hedge fund Elliott Advisors has disclosed a substantial stake and laid out a plan—“Streamline66”—to unlock value by spinning off the midstream segment, optimizing operations, and improving capital allocation. Elliott believes this plan could more than double the share price, with a path to $200+ per share if fully executed. In our view, Phillips 66 represents a compelling sum-of-the-parts opportunity, with undervalued assets and a clear catalyst for rerating. This is a classic activist setup with multiple ways to win and limited long-term downside due to the durability of its infrastructure assets and refining moat.

Thesis

1. Sum-of-the-Parts Discrepancy Elliott Advisors highlights that Phillips 66’s midstream segment alone could be worth $40 billion—equivalent to the company’s entire current market cap. PSX also owns valuable stakes in: • CPChem (chemicals JV with Chevron, est. value ~$15B) • JET Retail (Europe) and U.S. marketing, est. value $13B • A large, complex refining system, potentially worth $34B based on peer comps Despite these assets, the market prices PSX at just ~$97/share, implying virtually no value for its refining business and a heavily discounted sum-of-the-parts valuation. 2. Midstream Spin-Off Creates Shareholder Value The midstream business is fee-based and resilient, with >95% of earnings from stable contracts. By spinning it off or selling a stake, PSX could: • Unlock a 10–12x EBITDA multiple (vs. depressed conglomerate multiple today) • Raise significant capital or distribute shares to unlock value for shareholders • Improve operational focus across remaining segments The potential valuation uplift from a midstream spinoff alone could drive shares to $150 without including further actions. 3. Refining Mispricing Is Overdone Investors are wary of the refining segment due to: • Cyclical earnings • Exposure to crude oil volatility • Uncertainty around future gasoline/diesel demand with EV adoption However, Elliott rightly argues that refining is supply-constrained and benefits from: • Extremely high barriers to entry (regulatory + capital) • Lack of new capacity being added • Operating leverage during margin spikes PSX’s refining footprint is comparable to Valero or Marathon Petroleum—yet is currently valued at less than $2B by the market. Proper execution and transparency could help the market ascribe a fairer multiple. 4. Activist Catalyst + Operational Playbook Elliott proposes a proven framework that mirrors its successful campaign at Marathon Petroleum (MPC), which resulted in: • Divestiture of Speedway for $17B • Over $1B in cost cuts • 300%+ shareholder returns The same restructuring logic applies at PSX, where cost bloat, management missteps, and poor capital discipline have suppressed valuation. Elliott’s proposal includes: • Appointing new board members • Establishing clear performance metrics • Exploring asset sales and spin-offs • Refocusing capital on shareholder returns 5. Valuation Upside Elliott estimates the equity value of PSX under a full restructuring to be $200–$300+ per share, with major upside drivers being: • Realization of fair value for midstream and chemicals • Refining margin normalization and performance improvement • Asset divestitures and disciplined buybacks Even without full execution, a partial implementation of Streamline66 could drive a rerating to $150+/share—representing 50%+ upside from current levels.

Risks

1. Oil Market Volatility While midstream and chemicals offer steady cash flow, refining profits are still sensitive to crack spreads and oil prices. A sharp downturn in refining margins could depress short-term earnings, even if asset value remains intact. 2. EV Penetration & Energy Transition Longer term, the global shift toward electrification and alternative fuels poses a risk to demand for refined petroleum products. However, refining demand is unlikely to fall off a cliff and remains structurally important over the next 10–15 years—especially in emerging markets. 3. Execution Risk Management may resist Elliott’s proposals or execute them poorly. Delays or watered-down actions could dampen investor enthusiasm and prevent the stock from rerating. 4. Valuation Overhang or Miscommunication The market could remain skeptical about the sustainability of refining cash flows or assign a continued “conglomerate discount” if spinoffs aren’t executed cleanly. There’s also the risk that management overstates cost savings or misses updated performance targets.

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