Phillips 66 and activist investor Elliott face off on a classic conglomerate quandary: Are the pieces of a huge company worth more together or broken up?

The competing websites and investor campaigns are part of a giant fight to determine the fate of the oil-refining and pipeline giant. The contest pits one of the energy sector’s most storied players, which started 108 years ago as the Phillips Petroleum Co., against arguably the most influential activist fund manager in the world, Elliott Management, led by billionaire Paul Singer. Though negotiations started out cordially enough in 2023, Elliott has since gone nuclear, arguing that shareholder patience was punished and launching an all-out battle for four new board directors in March—the maximum amount on a staggered board. The conflict is a classic battle that has dogged Fortune 500 companies for decades—whether to remain a large enterprise or to submit to hardball activists looking to break them up.

As the clock ticks toward a May 21 shareholder meeting, the battle escalated this month with more mudslinging and accusations of deceit on both sides as Elliott, which owns a nearly 6% stake in Phillips, contends major changes are needed to right the ship of a slumping industry icon that’s underperformed compared to its peers. Phillips 66, which has a $40 billion market cap, counters that it is now hitting its targets and is in the early innings of transformative change—essentially hold the line and keep the faith.

Specifically, Elliott wants Phillips 66 to operate as a pure-play refining and biofuels company, spinning off or selling its massive pipeline and terminals business, and selling its petrochemicals joint venture stake in Chevron Phillips. That runs counter to Phillips 66’s strategy of late to grow its midstream pipeline business, especially in natural gas liquids (NGLs), such as propane, butane, and ethane—the primary petrochemical feedstock.

In a video, Phillips 66 Chairman and CEO Mark Lashier contends, “The reliable value that we create and strive to grow for you, our shareholders, is at risk due to Elliott’s shortsighted, risky proposals. The Phillips 66 board and leadership team has sought to engage constructively with Elliott, but Elliott’s thesis relies on market timing and commodity cycles, which are highly volatile.” In an April 3 letter, Elliott said Phillips 66 “reneged” on past promises. “At this point, it has become clear that sweeping changes are needed—changes to the company’s structure, its operations and its board.”

Phillips 66 and Elliott declined to comment to Fortune.

Arjun Murti, partner at the energy research and investment firm Veriten, said the dispute is about an industry-wide question on whether companies can prove the value of greater integration.

“I think there’s this idea that if you split up, today you’re going to get a higher evaluation,” Murti said. “If you did the theoretical sum of the parts, you might be able to put a higher multiple on individual pieces. But that’s a moment in time.

“I think it’s incumbent on companies to show that, if they are diversified in some manner, they can actually generate double-digit returns on capital through a cycle. If a company can show it, then you’re going to be better off with the diversification over the long run.”

Proving value

The U.S. energy sector is evolving quickly with rising exports of petrochemicals and NGLs, triggering growth for the midstream pipeline, processing and terminals businesses while the traditional oil-refining industry remains more mature and staid without much increase in domestic fuel demand.

As such, Chris Noonan, senior analyst and chief revenue officer for East Daley Analytics, sees Elliott’s point. “The market in general is changing. Crude oil was the driver of a lot of the growth. We’ve seen that slow down,” Noonan said. “But the light end of the barrel—propane, ethane, the light byproducts—not only the U.S. investment, but also the world investment—it’s where the money is flowing.”

“I think it’s a smart decision to bifurcate the flat assets that you see out there,” Noonan added, referencing refining, “and really focus on the growth assets so that the market can value them separately.”

Phillips 66 was born in its current structure in 2012 when it splintered from ConocoPhillips, creating separate companies focused primarily on downstream oil refining and on upstream oil and gas exploration and production, respectively.

Phillips 66’s midstream pipelines and terminals vehicle, Phillips 66 Partners, then went public in 2013 as a master limited partnership (MLP).

However, since then, the MLP structure became less profitable for the industry, and, in 2022, Phillips 66 completed the roll up and integration of its MLP back into the corporate structure, giving Phillips 66 much greater ownership of pipelines, processing facilities, and export terminals.

Since then, Phillips 66 has focused its growth on its pipelines business, getting increasingly acquisitive with purchases of its DCP Midstream joint venture, Pinnacle Midstream, and, just this month, the EPIC NGL pipelines business for $2.2 billion.

The company argues the deals strengthen Phillips 66 as a “leading integrated downstream energy provider” with pipelines, processing, refining, biofuels and petrochemicals.

Instead, investor sentiment may be swinging back toward spinoffs and pure plays, said Allen Good, energy analyst for Morningstar. And, as a result, Phillips 66 is almost a victim of its own midstream growth and success.

“Phillips 66 has doubled down on their midstream,” Good said. “Now those assets are much more material in size. It’s sort of basic math if you spin these assets out, and you put a [larger] multiple on them. That’s some pretty big uplift.

“Phillips 66 has a pretty tough argument to make. The argument is they have some pretty good synergy and it helps them ride the cycles so they’re not exposed to the downsides. But that’s a tougher argument to make when refining had done so well in the past few years [prior to 2024].”

Elliott specifically notes Phillips 66 has underperformed its refining peers Valero Energy and Marathon Petroleum. Marathon spun off its midstream assets into MPLX and, following an Elliott campaign, in 2020 sold its retail fuel business, Speedway. “They can point to a use case there where this company followed their advice, and, look what happened,” Good said.

In February, Elliott also launched a campaign against Big Oil giant BP and its subpar performance. BP has since announced a hard reset to emphasize fossil fuel growth and scale back on renewables. The chairman also resigned. Elliott then initiated recent shorts on Shell and TotalEnergies.

An escalating feud

Elliott first reached out to Phillips 66 in late September 2023. They reached a deal and détente—after Elliott privately threatened to start a proxy fight with six board nominees—naming Robert Pease, former CEO of refiner Motiva Enterprises, to the board in mid-February 2024, and agreeing to select one more director together.

But that second one never came. In March 2024, former Phillips 66 CEO Greg Garland, who had remained chairman, retired and Lashier became chair as well as CEO—against Elliott’s wishes, although Elliott’s opposition was not publicized at the time.

Elliott contends: “During the interview process with us, Mr. Pease shared the very clear view that having a CEO also serve as board chair was detrimental to a company in need of change. Yet, just one month after Mr. Pease joined the board, he apparently voted to appoint CEO Mark Lashier to the position of chairman as well—contrary to governance best practices and to the view he shared with us.”

Pease is now one of the four directors up for re-election that Elliott aims to replace.

And Pease now criticizes Elliott for its “inconsistent engagement” of “long silences, followed by rapid public action.” Pease backed the other Phillips 66-recommended candidates in a March 28 letter. “We are committed to challenging management to deliver results. We are committed to acting, when necessary, but we are not a group that makes sweeping, irreversible costly change in response to short-term market fluctuations and speculative valuations.”

Elliott and Phillips remained engaged off and on until August when executives informed Elliott that a second board director was identified—someone who Elliott wouldn’t support because of her lack of refining and industry experience, according to Elliott’s SEC filings.

Former PepsiCo COO Grace Puma was added to the board in October.

Then, radio silence until February.

“Eighteen months ago, we were willing to give the company and its leaders a fair chance to restore Phillips 66 to best-in-class performance,” Elliott stated. “We patiently supported them in their effort to do so. Unfortunately for investors, patience has been punished.”

In an April 8 letter from the Phillips 66 board, it said the company is “implementing a clear transformative strategy that has delivered results.” Continuing to emphasize midstream growth, the board said, “We’re in the early stages of building out a world-class midstream business in the advantaged Permian Basin”—the basin which leads the nation by far in crude oil and NGL production.

“Elliott seeks rapid, irreversible change in pursuit of an unrealistic thesis—and risks halting the momentum on our long-term value-creating strategic plan,” the board added.

One day after the April 8 letter from Phillips to shareholders, prominent Phillips 66 shareholder Gregory Goff came out in his support of Elliott, arguing Phillips 66 “has lost its way” and needs a stronger board. Goff stands out as a longtime ConocoPhillips executive who then became CEO of refiner Andeavor until it was sold to Marathon in 2018.

The catch, which Phillips 66 called a stunt that “reflects Elliott’s growing desperation,” is that Goff and Elliott have a standing business partnership. Goff is now the CEO of Elliott-backed Amber Energy, which is currently a shell company seeking to buy fellow U.S. refiner Citgo Petroleum through a court-controlled bidding process. The Citgo sale process is scheduled to conclude in July.

“Elliott continues to use its activist playbook to avoid collaboration, cloud the discussion and drive a false narrative to promote their short-term agenda,” Phillips 66 added.

Elliott replied: “Mr. Goff’s work alongside Elliott—which was clearly disclosed in our press release and public filings—was hidden from no one, and in no way represents a conflict of interest, diminishes the independence of Mr. Goff’s views or impairs his ability to help Phillips 66 become a stronger, more valuable company.”

More shareholders are likely to get involved, and further escalation is expected between now and the May 21 annual meeting votes as investors pick their sides.