November 1, 2019

Breakingviews: Elliott nabs easy win by playing pass the pump

by Breakingviews.

Elliott Management just scored another easy layup, with an assist from itself. One of the activist’s most recent targets, $44 billion oil group Marathon Petroleum, on Thursday said it’s ousting longtime Chief Executive Gary Heminger, reviewing its pipeline business and spinning off Speedway, its retail arm. But the story has a twist. Speedway bulked up after buying gas stations in 2014 from Hess, which the energy group sold after a bruising proxy battle with – surprise, surprise – Elliott. Double dipping makes activist wins a whole lot easier.

Paul Singer’s $38 billion activist shop may well be crowing today. It first put pressure on Marathon to break up its three core units – refining, pipeline and retail – three years ago, among other changes. But it recently upped the ante, sending Marathon a presentation and an aggrieved letter a month ago complaining about the company’s broken promises to review and reform its structure. D.E. Shaw and other shareholders supported the action.

Elliott is certainly correct that spinning out Speedway should unlock serious value. The spun-out retail business could offer a best-in-class 6% free cash flow yield and dividend and buyback yields of up to 3%, according to JPMorgan. The unit’s EBITDA has grown more than 300% since Marathon took over in 2011, according to a company presentation. And Marathon has returned over $20 billion to shareholders in the same period on the back of Speedway’s performance.

But part of the reason Speedway is such an attractive stand-alone property is because of how it bulked up with assets from Hess.

There’s obviously nothing wrong with putting pressure on one company to restructure and then cajoling the new owner of the company’s assets to spin out the subsidiary that holds them. And Elliott’s concerns with Marathon obviously go far beyond gas stations. But this is still somewhat reminiscent of Elliott’s campaign against Sempra Energy last year, citing overexpansion, when Elliott itself had supported Sempra’s $9.5 billion purchase of Oncor.

Following where future Marathon assets end up might lead to Elliott’s next target.

(This item has been corrected in the third paragraph to indicate that Marathon, not Speedway, returned capital to shareholders and removes line stating the refining peers’ average EBITDA growth rate was 253% since 2011, as this figure refers to total shareholder return.)

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