By Svea Herbst-Bayliss

NEW YORK, March 4 (Reuters) - Elliott Investment Management nominated seven directors to Phillips 66's PSX.N board, laying the groundwork to push for changes that include spinning off or selling its midstream business, two people familiar with the matter said.

The activist investment firm last month disclosed a $2.5 billion stake in the oil refiner, returning for a second campaign just over a year after it made a $1 billion investment in late 2023 and pressed, with limited success, for strategic improvements.

Elliott now wants Phillips 66, which has a market value of $52 billion, to address its lagging stock price, improve its refinery operations and upgrade its board, the firm said in a public letter last month. The company's share price has fallen 13% in the last 52 weeks.

Elliott privately nominated executives with investment, financial, legal and energy experience, the sources said, adding that seven nominees give the investor flexibility ahead of planned board changes.

The board currently has 14 members but will shrink to 12 after the company's annual meeting in May.

A Phillips 66 representative was not immediately available for comment while Elliott declined to comment. The sources requested anonymity to speak about the private discussions.

Elliott, which invests $70 billion, has a strong record in the energy sector and has made successful investments at Marathon Petroleum MPC.N, NRG Energy NRG.N, Suncor Energy SU.TO and Hess HES.N. All were led by John Pike, a partner with the firm, who is also spearheading the Phillips 66 campaign and a recent $2.5 billion investment in BP BP.L.

The slate of directors, according to the sources, includes Pike, Brian Coffman, a former CEO of oil and gas company Motiva Enterprises, Sigmund Cornelius, a former chief financial officer at ConocoPhillips COP.N and Alan Hirshberg, a former senior executive at ConocoPhillips and Exxon Mobil XOM.N.

Elliott will disclose a finalised number of candidates shareholders can potentially elect when it files its definitive proxy materials with securities regulators, the sources said.

Elliott is also taking aim at the company's corporate governance, namely its classified board. Phillips 66 tried and failed a handful of times in recent years to change its charter so that all directors stand for election annually. To carry the motion, holders of 80% of all outstanding shares need to vote in favour and not enough have participated to meet that threshold.

Investors and proxy advisory firms, including Institutional Shareholder Services, generally frown on classified boards where only some directors are elected every year.

Elliott is proposing that each incumbent director would be required to commit to one-year terms at each annual meeting – which would make all board seats open annually, the sources said.

When Elliott last pushed for changes at Phillips 66, the two sides agreed to work together to appoint two new directors. There was no formal settlement or cooperation agreement and only one director, Bob Pease, was added in connection with Elliott's engagement in 2024.

Since its founding in 1977 with $1.3 million, Elliott's assets have ballooned to $70 billion and the firm has become one of the world's busiest activists, targeting ever bigger companies over the last five years, industry data show.

Last year, it approached 15 companies including Southwest Airlines LUV.N and Starbucks SBUX.O, securing a combined 12 board seats as well as other changes.

(Reporting by Svea Herbst-Bayliss; Editing by Edwina Gibbs)

((svea.herbst@thomsonreuters.com; +617 233 2138; Reuters Messaging: svea.herbst.thomsonreuters.com@reuters.net))