Shares of U.S. oil and chemical refiner and midstream giant Phillps 66(NYSE: PSX) rallied 14.6% in March, according to data from S&P Global Market Intelligence.
Not only did Phillips 66 benefit from an increasingly favorable pricing environment for refiners, but the company's CEO also said in an interview its new strategy earned the approval of the company's high-profile activist investor.
Elliott signs off as the 3-2-1 crack spread elevates
In an interview on March 27, Phillips CEO Mark Lashier said that Elliott Management, the activist hedge fund that took a $1 billion stake in the refining giant last fall, had signed off on the company's strategy to boost shareholder value.
The strategy seeks to improve the company's refining performance, which has lagged behind peers, while also cutting costs up to $1.4 billion over time, with $1 billion in cost cuts targeted by the end of this year. Phillips is also targeting a 2025 mid-cycle, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) target of $14 billion, $4 billion higher than prior to the new strategic initiative. Phillips also plans to boost share repurchases and dividends going forward. Finally, Elliott has pushed for more directors with refining experience. In late February, Phillips appointed experienced refining executive Robert Pease to its board of directors.
March's performance wasn't only due to Elliott apparently endorsing management's plan. The overall environment for refining stocks has been very favorable this year. The 3-2-1 crack spread, which is a standard unit of industry margins, has risen about 33% on the year, in a relatively consistent fashion. While the crack-spread margin is lower than the 2022 highs, it's now higher than what has historically been normal. The recent tensions in the Red Sea have added to the cost of shipping fuel, while low natural gas prices in the U.S. are lowering Phillips' input costs as well.
Phillips has had a strong run
As was the case in the wake of Russia's invasion of Ukraine, refiners have proven themselves to be pretty good hedges against certain geopolitical tensions.
Of course, Phillips has had a strong 30.7% run year to date and probably won't match that pace going forward. While the company only trades at 11 times earnings, those earnings are based on above-normal refining profitability.
Still, with the company in the midst of some self-help via its strategic plan and activist involvement, the stock may still be worth a look today. After all, management just announced another 10% boost to the dividend, which now yields 2.7%.
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Billy Duberstein has positions in Phillips 66. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
