In a clear demonstration of the risks associated with lackluster performance as a publicly traded enterprise, Phillips 66 (NYSE:PSX) is incurring the scrutiny of Paul Singer, founder of Elliott Management. In a letter to Phillips’ Board of Directors, Elliott is urging for changes to help unlock significant value. Subsequently, PSX stock is popping up sharply today to the delight of bullish options traders.
According to the letter, Elliott has invested approximately $1 billion in Phillips 66, a reflection of its confidence that the company can realize robust value creation. However, the firm emphasized that in recent years, the performance of PSX stock has slipped as the underlying enterprise has “shifted its focus away from its Refining segment.” So, when the “refining super-cycle” materialized in 2022 and 2023, Phillips 66 was poorly positioned.
As a result, competitors Marathon Petroleum (NYSE:MPC) and Valero Energy (NYSE:VLO) have seized the opportunity while PSX stock has lagged behind. In addition, Elliott believes that Phillips has lost discipline regarding key metrics like operating expenses per barrel. As a result, the hedge fund is seeking changes, which include the following:
- The appointment of two new directors to Phillips 66’s board.
- A transition to a new CEO.
- An improvement in refining operations under new leadership.
- The sale of the company’s Speedway retail operation.
By agreeing to the proposal, Elliott believes that the energy firm could restore lost trust among PSX stock shareholders.
PSX Stock Offers Popcorn to the Options Show
Fundamentally, it may be difficult for Phillips 66 to at least not consider the framework laid out by Elliott. As The Wall Street Journal points out, Marathon agreed to spin off its gas station chain in 2019. It also considered shaking up its executive leadership in a nod to activist stakeholders, including Elliott.
Elliott also commands a massive ace up its sleeve — math. Put another way, it’s practically impossible to argue with the results. Over the trailing five years, PSX stock has gained more than 30%. In sharp contrast, MPC has skyrocketed over 120%. Additionally, while VLO is nowhere near this performance, it still manages to beat PSX handily, up more than 50% over the past five years.
Even better, bullish options traders can thank Elliott for lighting a fire under PSX stock. According to Fintel’s options flow screener, several major transactions feature bearish implications. However, many of these trades are at risk of getting blown up.
In particular, on July 7 earlier this year, a major entity sold 1,245 contracts of the Jun 21 ’24 110.00 Call. At the time of the transaction, PSX stock traded hands at around $99. However, at the current price of around $122, PSX stands around 10% above the $110 strike price. Since call writers (sellers) must fulfill the terms of the option upon exercise by call holders, the bears have two basic solutions: Buy the calls or buy PSX in the open market (if the calls represent a naked position).
Either way, the near-term path seems bullish for PSX stock.
Why It Matters
Over the past three months, analysts rate PSX stock as a consensus moderate buy. This assessment breaks down as nine buys, four holds and zero sells. Overall, the average price target lands at $131.64, implying more than 7% upside potential as of this writing.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
