Phillips 66 Leans into Midstream Growth Despite Elliott Activism

Editor’s note: This article has been updated to include relevant background information from Phillips 66’s board meeting on May 21.

ConocoPhillips and Phillips 66 splintered in 2012, creating separate, publicly traded upstream and downstream energy giants amid the move away from integrated energy players.

Less than a year later, Phillips 66 spun off its midstream assets into Phillips 66 Partners, birthing a master limited partnership (MLP) at the height of the energy MLP wave.

Over the course of a decade, Phillips 66 Partners, or PSXP, grew but also dealt with the fall of the MLP trend. In early 2022, Phillips 66 rolled PSXP back into the parent and, in 2023, took ownership of its DCP Midstream joint venture (JV).

By the end of 2023, the refining behemoth Phillips 66 had become a midstream giant, especially for the NGL value chain, and that growth continued last year with the deal for Pinnacle Midstream in the Permian Basin and, especially, in January with the $2.2 billion EPIC NGL acquisition.

Phillips 66’s 2025 planned capex is $975 million for midstream and $822 million for refining. For 2024, midstream counted $2.75 billion in adjusted earnings, while refining counted a $211 million loss amid weaker margins and lower market crack spreads. The numbers speak for themselves.

The midstream segment of Phillips 66 has become almost too successful for its own good. Activist investment firm Elliott Investment Management in February announced it built a $2.5 billion stake in Phillips 66 and is pushing for a sale or spinoff of the midstream business.

After a series of meetings and after Elliott proposed a slate of replacement directors at Phillips 66, Chairman and CEO Mark Lashier touted Phillips 66’s improvements and criticized Elliott for its “series of attacks,” arguing that the firm chose to “forego constructive dialogue with us and launch their activist playbook.”

“Nevertheless, we remain fully committed to constructive engagement and finding a path forward with Elliott that will benefit all shareholders,” Lashier said.

Editor’s note: Of the four seats up for election on May 21 on Phillips 66’s board, Elliott won two seats and Phillips 66 won two seats.

Don Baldridge, Phillips 66 executive vice president for midstream and chemicals, came from the DCP side of the business and has helped lead the growth.

While he did not discuss the Elliott campaign, Baldridge sat down with Hart Energy contributing editor Jordan Blum to discuss the value of the integrated midstream and downstream giant that also works closely with its JV partner, Chevron Phillips Chemical.

Jordan Blum: When most people talk about Phillips 66, they think refineries. I wanted to get your take on the rapid growth of the midstream side. There’s been the roll-up of Phillips 66 Partners and a lot of acquisitions of late. How important has that growth been during a time of weaker refining margins?

Don Baldridge: I’d probably take you back and set the context. If you think about Phillips 66, we really operate in two value chains. One is our crude-to-clean products, which is our crude pipelines, our refineries, and then the refined products, terminals and transportation and delivering that to the end market through our marketing segment. That value chain obviously has an important midstream component in it.

And then we have our NGL value chain, which is really our wellhead to market, which, as of late with the DCP [Midstream] buy-in in 2023, that really bolstered that value chain and really put the pieces together from gathering and processing through our NGL transportation system that was largely within the DCP family. And then Phillips had the fractionation and export. So, really, bringing that together created a platform that we’ve really been able to grow and leverage.

When you look at the supply growth in the U.S. from a production standpoint, you are seeing good growth from an NGL perspective. In the Permian and some of the other areas where we operate with gathering and processing, for a given amount of crude oil there’s more NGLs and gas that is coming out of those wells. It’s becoming gassier. You’re seeing that volume growth across our system, and so it affords us the opportunity to expand our value chain with that as a backdrop, as well as the asset base and the footprint that we have. As you mentioned, we rolled up PSXP and bought in DCP. It’s really created a platform that’s enabled us to augment our services through our customers and really be a competitive force in that arena, and it’s driving a lot of opportunities to Phillips.

JB: You came from the DCP side of the business. I wanted to get your perspective coming from the acquiree side and taking over the midstream side of things here, and how that transition has been.

DB: It’s a super great opportunity personally, but also just professionally. I started with DCP in 2005, so 20 years ago. Even when I was with DCP, we always had a lot of interaction with Phillips 66 as a 50% owner since the spinoff from ConocoPhillips. There’s always been a tight relationship. We’ve been co-owners in the NGL pipelines as DCP, so we fed a lot of NGLs to both CPChem (Chevron Phillips Chemical) as well as Phillips 66. What’s really rewarding is, when we put these two companies together and rolled up DCP and Phillips 66 Partners into Phillips 66, the platform that we put together has created a tremendous amount of synergies. We targeted about $400 million of synergies, and we hit $500 million.

If you look at the journey of Phillips 66 from a midstream standpoint, they’ve basically doubled their earnings in midstream. It’s been a tremendous growth rate. Putting all of this together inside of Phillips 66 has really afforded us the ability to leverage the integrated model where we have a significant amount of midstream assets that are in service to the crude-to-clean products, and being able to put our operations hat on where we really operate seamlessly across all those midstream assets and leverage the scale and scope we have. At DCP, we were really just focused on gathering and processing and had our downstream NGL pipeline business. You put all of that in Phillips 66, and we’ve really been able to capture it. You see it in the synergies, numbers, the benefit of scale and the benefit of a broad integrated platform that Phillips 66 has. That’s why I’m so excited to be here.

We rolled out a pretty aggressive growth forecast here on the last earnings call. From a midstream segment standpoint, we generate on a run rate about $4 billion EBITDA, and we see a pretty clear line of sight to grow that to $4.5 billion of EBITDA by 2027. So that’s a mid-teens growth rate. That’s an exciting backdrop to have in the midstream business.

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JB: In that vein, Phillips’ 2025 midstream capex is slightly bigger than the refining capex. What does that say, if anything, about the direction of Phillips 66 and the industry as a whole?

DB: From the value chain standpoint, our job is to allocate capital appropriately for capturing the right returns and generating the right earnings for Phillips 66. That overarching objective is really what drives where capital goes, and not so much a segment or area. I think it’s really a reflection of the underlying growth we see in the NGL value chain. That’s really where we see a lot of growth opportunities because of the volume of supply, as well as the need to get that production onto the water and hit the global market.

From a Btu standpoint, we are producing as a country more than we’re consuming, and so we need to get the gas, the NGLs, offshore. That drives a lot of the capital allocation. One thing to be clear is we are committed to having, in our value chain of crude-to-clean, the best operated refineries. Those are still extremely important to our business. The importance of having safe, reliable refining operations is critical.

JB: You mentioned the importance of more NGL exports. But, in the last decade or so, there’s been a wave, especially with CPChem, of ethane cracker construction. What are your thoughts on that domestic petrochemical growth and balancing out the need for getting more NGLs on the water?

DB: When you look at the [U.S.] Gulf Coast, we are in a very advantaged position from a petchem standpoint. That’s why you see CPChem developing a Golden Triangle [Polymers] project. The ethane feedstock is a huge competitive advantage in the petrochemical space globally. In the U.S., where you have very reliable supply and good access, those are all the right conditions. The petchem industry and CPChem are in a very advantaged spot given that feedstock supply. That’s an important component of our business.

There’s still excess ethane that is going offshore either as ethane to petchems that are operating globally, or into the natural gas stream for LNG exports. That part of the balancing of the market is still important and will be as volumes grow for that product placement on the water. Is there room for another cracker or two in the Gulf Coast? I think there are companies out there that are having thoughts and plans, and so I wouldn’t be surprised if, over the next five to seven years, you see another Gulf Coast world-scale cracker get developed.

JB: In terms of long-haul NGL pipelines, do you think there’s enough capacity now with everything in development? Obviously, there’s been a good bit of buildout of late.

DB: When you look at the production out of the Permian Basin, there’s right now a need for capacity, and capacity is coming online from a couple of different parties. We recently announced the signing of definitive agreements to acquire EPIC NGL. They have an expansion that’s going to come online. There’s one segment of expansion that comes online this year and another by the end of next year. And then there’s a couple of third-party lines that are in the process of coming on or will be coming on later this year. We see that capacity needed based on where the production’s growing, and I think that’s a good thing for a midstreamer. We certainly like more volume. We’re pretty excited about being able to expand through the EPIC acquisition, getting more capacity. That was certainly one of the key drivers in that acquisition was that additional NGL transportation out of the Permian.

JB: You just touched on it, but can you elaborate on the EPIC deal and, strategically, why that was such a key move?

DB: One [reason] I just mentioned was the NGL transportation and that access. It’s got a good network today from a transportation standpoint, but it’s also in that part of the expansion cycle where it has probably the most cost-competitive, lowest-capital expansion capability by adding pumps on the pipe and expanding. That was an attractive element—that capacity and capacity expansion on the NGL transportation side.

Then, you look at their Gulf Coast presence where they have existing 170,000 bbl/d of fractionation capacity in that Corpus Christi area where we see some attractive expansion capabilities around that fractionation facility in Corpus. We like that diversity in location to Corpus and Sweeny (legacy Phillips 66 refinery and petrochemical complex). When you look at the map, all that is very well connected with us already. We take and send product back and forth between the two systems. Putting that [EPIC] with our system, it creates this network of pipeline capacity for purity products—that’s Corpus all the way into Mont Belvieu through Sweeny. That shuttle system of product ability to move up and down the Gulf Coast was another big element that we found very interesting.

Lastly, it’s just from a supply connectivity [standpoint]. They’re tied to about 12 natural gas plants, seven of which are facilities that we aren’t currently attached to. It broadens our supply footprint. As we connect this system into the Phillips 66 system post-close, we think we offer the EPIC customers even broader access from a geographic diversity, even higher reliability service because we’ve got multiple pipeline routes now out of the Permian Basin. The EPIC customers are predominantly large, household name E&P producers, and we think that’s lastly probably the third leg that made that transaction pretty attractive for us.

There’s a lot of focus on the Permian, which makes sense, but we do have a robust system all the way north up into Colorado. We bring a lot of volumes from Colorado through the Midcontinent, and that all is tied into our Sweeny hub, as well, when you look at that pipeline configuration. We are actively restarting our Powder River NGL Pipeline that extends all the way up into Wyoming, and we expect to be able to pull barrels even from the Bakken into that line and move those barrels all the way down to Sweeny. That sort of geographic reach, scale and scope is very impactful in terms of what the opportunities are where we can go, the conversations that we have with customers, the services that we’re able to provide.

JB: More dots you can connect.

DB: Yeah, if you look at our map, those pipelines are like our tree branches, and then we’re putting supply ornaments on that tree to feed all the way down to the base, which is our Sweeny hub.

JB: You were talking about the importance of the Permian supply growth and, not too long ago, you had the Pinnacle Midstream acquisition there. Can I get you to highlight on that the importance of that deal?

DB: After we brought in PSXP and did the DCP transaction, we were really in a spot to pivot toward growth, and that’s where the Pinnacle opportunity came in. It was really the right place, right size, right time, if you will. It was there in the Permian Basin. It has a good supply network tied to it with a gas plant there, and a shovel-ready gas plant expansion next to it with easy connectivity to our Sand Hills NGL system. That was one of those timely bolt-on acquisitions that was a big enabler for us to accelerate our growth from a supply and gathering and processing standpoint in the Permian Basin.

I would say that is a really good example of how we think about M&A. It is a high-quality asset that—when bolted onto our system—we can capture a lot of synergies and that is readily expandable and provides that enabler of future growth. Pinnacle checked all those boxes. That’s almost the

same filter that we would run EPIC through, and EPIC checks all those boxes. We bought Pinnacle last year and immediately pivoted toward expanding it and building a second gas processing plant. We expect that plant to come online in July. All of that is to feed our downstream NGL system, which ties into EPIC. We need more NGL transport capacity. We move a lot of product on third-party pipelines.

One of the things Phillips 66 has that’s a differentiator is the global presence with trading offices in Singapore, Calgary and London, and we talk a lot about integrated value chain. That’s where I see some of the real benefits to integration where we have folks that are very active globally in crude and refined products and, now, as we grow LPGs and fold that into that activity. We see that growth being pretty attractive as we grow our volumes in the U.S. that hit the global market. Being adept and having that global marketing presence I think is going to be increasingly important.

JB: You’re obviously NGL-heavy by design. I wanted to get your thoughts on some of the other natural gas demand pulls. Obviously, everything with LNG, but of course you can’t have a conversation now without talking about data centers and AI and everything there.

DB: I think the natural gas demand outlook, domestically, certainly has shifted and pivoted as we think about these AI and data center demands. We move a lot of gas through our gas plants, and we get a lot of interest as to how you can place some of these data centers near production so that you get the benefit of direct supply access. I think there’s going to continue to be that kind of market opportunity. Just broadly speaking, more demand in the natural gas arena is just a positive pull when we think about it from a midstream standpoint.

JB: I’m not going to pull you too deep into the political conversation but, with the new administration, there’s a lot of talk about infrastructure and permitting reform, a lot of talk about wanting to do NEPA reform. What would you like to see that you think is realistically possible?

DB: When you look at our business, and not just Phillips 66, the types of investments that we have to make and to execute on, those are long-term in nature. Having really positive, durable policies in place from a regulatory standpoint are really critical to being able to make those investments and stimulate those kinds of business opportunities. We’re certainly hopeful we can see some of that activity, whether that be permit reform or just more durable legislation that is pro-energy. From a party standpoint, having one party in the White House as well as same party that’s governing in the House and Senate, I think affords the ability to pass some pro-energy policy. We’ll see how things play out. There’s certainly a lot in flux.

JB: I also wanted to get your take on industry consolidation. Obviously, most of the focus is on upstream, but there’s been a lot of midstream, too, and I think a lot of analysts see that trend continuing. What’s your take on just the midstream consolidation trend, where we’re headed, and how much you see Phillips 66 continuing to be a consolidator?

DB: We had [almost] 80 MLPs that were midstream, and now we’re down to less than half of that. So, consolidation has certainly been afoot for a while now. I do think Phillips has the scale and scope, and you’re seeing us participate as a consolidator of midstream. We think that is a part of the industry where scale matters from a size standpoint. That’s important for being cost-competitive, having good market access and providing good reliable service to the customers. There are only four or five midstream companies that have the wellhead-to-market capability, and certainly Phillips is front and center. There is a consolidation, and we think that Phillips has a really good platform to be impactful in that trend.

JB: And some of the strategic, non-core asset sales to help fund that growth? The Gulf Coast Express Pipeline and the Rockies Express Pipeline?

DB: That’s one of those processes that we’ll continue to go down where we look at our strategy and think about what’s the degree of fit that the assets in our portfolio have with that strategy. Phillips 66 is blessed with a wonderful portfolio. It’s a question of if it’s worth more to somebody else than it is to Phillips from a valuation standpoint. So, you’ve seen us go through that process.

We were very direct early on in announcing a target of $3 billion of divestitures. We hit $3.5 billion at the last earnings call. This is a process that we’ll continue to go through and stay focused on our strategy. That’s the process that we’ve gone along with Rockies Express, our Discovery Pipeline asset with Williams [Cos.], our Gulf Coast Express.

JB: Switching gears, what can you say about products pipeline growth or anything else you want to highlight?

DB: Within our crude-to-clean value chain, what the team’s focused on is making sure that we’ve got the best access and lowest costs and flexible feedstock for our refineries so that they can optimize within the market for the best product yield. From a distribution standpoint on our clean products, ensuring that we can get product to the right market at the right time and then keep our system full. What’s impactful in the operations is this journey of continuous improvement of being able to maximize throughput in those systems without capital expansions, and really just running them better from an optimization standpoint. If you can get 5%, 10%, 15% throughput expansions through those efforts, it’s really, really impactful. We’ve seen that in our pipelines. We’ve seen that in our export facility where it was an 8 million barrels a month nameplate at Freeport [LPG Export Terminal]. And, this last quarter, we hit 10 million barrels a month. That was all through just operational efficiencies and operational excellence. Those are great returns that we stay focused on.

From a midstream standpoint, about a third of our midstream earnings come from that crude-to-clean product movement, and about two-thirds are the NGL value chain. So, it’s a very important part of our midstream platform, for sure.