Record Glut of Oil Refineries Selling at 80% Discount: Real M&A

By Joe Carroll and Jessica Resnick-Ault
Monday, February 21, 2011

Oil companies from Chevron Corp. to BP Plc are selling more refineries than at any time in history even as a rebound in demand for gasoline and diesel pushes profits from running the plants to the highest level since 2007.

A glut of refineries put up for sale by integrated oil companies after the global recession dragged down profits are now available for 80 percent less than they fetched in 2006, Dahlman Rose & Co.’s Sam Margolin says. Meanwhile Tesoro Corp., the subject of more than a dozen takeover rumors since 2007, has the cheapest valuation among U.S. refiners based on projected earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.

Blackstone Group LP, billionaires David and Charles Koch and energy producers from Brazil and Russia may be eyeing acquisitions of individual plants or company takeovers with refining margins almost tripling since Nov. 1, according to IHS Herold’s John Parry. There are 2.5 million barrels of daily refining capacity for sale globally, he said, enough to process the entire crude output of Nigeria or Norway.

“I’ve never seen this many refineries for sale,” said Louis Gagliardi, managing director of energy at Hedgeye Risk Management in New Haven, Connecticut. Buyers will do well “if the plant has a supply source right in its backyard, or it’s large enough to enjoy some economies of scale,” he said.

As a Texaco Inc. executive in the 1990s, Gagliardi was part of a special-projects group that vetted all projects worth $10 million or more for the board of directors.

Volatility in Margins

While the margins earned from turning West Texas crude and similar grades of oil into gasoline and diesel in the U.S. climbed to $25.43 a barrel last week, the highest level since 2007, integrated oil and gas companies that engage in exploration and production along with processing and marketing of the fuels have been trimming their refinery holdings to reduce the volatility of their earnings.

The oil-processing plants are vulnerable to swings in crude oil prices and to fluctuations in consumer demand. Ten-day volatility in the benchmark crude futures contract traded on the New York Mercantile Exchange reached 157.7 on Dec. 31, 2008, the highest level since 1991, data compiled by Bloomberg show.

Chevron, the second-largest U.S. oil company, has been trying to sell the Pembroke refinery in Wales, its only remaining European plant, since March 2010. The energy producer’s refining unit lost $613 million in the last quarter before it announced the sale after the longest U.S. recession since the Great Depression crimped fuel demand.

Lowest Valuation

San Ramon, California-based Chevron has the lowest valuation among integrated U.S. oil companies with a market capitalization of at least $1 billion, data compiled by Bloomberg show. Including net debt, it trades at 3.9 times estimated Ebitda for 2011. Chevron is rated A2H, the second- highest investment grade level, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, stock volatility, profitability and other financial ratios.

Sean Comey, a spokesman for Chevron, declined in an e-mail to comment on the company’s efforts to sell refining assets.

Murphy Oil Corp. said in July it would put its three refining plants up for sale to exit that business and focus more on production. The El Dorado, Arkansas-based company’s refinery in Meraux, Louisiana, leaked oil into a surrounding neighborhood after Hurricane Katrina’s flooding drenched the facility.

Refineries, Convenience Stores

Marathon Oil Corp. announced plans to spin off its six refineries and its Speedway convenience-store chain last month. The Houston-based company’s profit from the refining business had dropped 2.7 percent in the first three quarters of 2010, while earnings from exploration and production rose 85 percent.

The company is valued at 4.2 times estimated Ebitda, the second-lowest behind Chevron among U.S. integrated oil producers. Marathon Oil, which will create the fifth-largest American refiner when it spins off Marathon Petroleum Corp., has a cheaper valuation than any of the U.S. refiners that don’t drill oil wells, Bloomberg data show.

John Porretto, a spokesman for Marathon Oil, declined to comment on speculation or future business.

BP, Europe’s second-biggest oil company, said this month it will sell its Texas City and Carson refineries as the London- based energy producer recovers from the Gulf of Mexico spill, the worst in U.S. history. The Texas City refinery was the site of a 2005 explosion that killed 15 people.

Iain Conn, BP’s head of refining and marketing, told reporters in London on Feb. 1 the company expects to raise at least $4.4 billion from sales of U.S. refineries and retail assets.

Cheapest Grades

The U.S. refineries for sale by BP can process the cheapest grades of crude, such as those from Venezuela or Mexico, and have waterfront locations that reduce costs to receive crude and dispatch cargoes of gasoline and diesel, said Ann Kohler, a senior vice president at CRT Capital Group in Stamford, Connecticut.

BP’s Texas City refinery was deemed one of the country’s most attractive in 2008 by William Klesse, San Antonio-based Valero Energy Corp.’s chief executive officer. At that time, a Gulf Coast plant with the ability to process sludgy grades of crude oil could fetch $1,700 per complexity barrel, a measure used to price assets based upon their quality. The refinery will likely sell for just $350 per complexity barrel today, CRT’s Kohler said. That’s about 80 percent less than five years ago.

Toledo Plant

Sunoco Inc. of Philadelphia is also getting about 20 percent of historic valuations for its plant in Toledo, Ohio. PBF Energy Co. agreed to pay $400 million, which amounts to $2,285 for each barrel of processing capacity without adjusting for complexity, data compiled by Bloomberg show.

The price represents more than an 80 percent discount to the record $20,000 per-barrel Houston-based Lyondell Chemical Co. paid in 2006 to buy the Venezuelan state oil company’s stake in a jointly-operated Houston plant, according to Margolin, an analyst at Dahlman Rose in New York.

PBF is a Parsippany, New Jersey-based acquisition vehicle led by former Phibro crude trader and refining magnate Thomas D. O’Malley and backed by Blackstone and First Reserve Corp. of Greenwich, Connecticut. PBF has acquired Valero plants in Delaware City, Delaware, and Paulsboro, New Jersey, for a total of $560 million.

O’Malley declined to comment through PBF President Michael Gayda. Christine Anderson, a Blackstone spokeswoman, didn’t return a telephone message seeking comment.

‘Lot of Upside’

While prices for refineries have started to inch up as the rebound in energy demand boosts margins, assets still are cheap relative to future profitability, according to Tony James, president of New York-based Blackstone.

“Each refinery has gotten a little more expensive as the cycles healed,” James said during a Feb. 3 conference call with analysts and investors. “But we still think we’re at the low” part of the refining cycle with “a lot of upside,” he said.

Koch Industries Inc., the holding company controlled by the Koch brothers, hasn’t added to its refinery network since the 1998 acquisition of a Rotterdam plant from New York-based Goldman Sachs Group Inc.’s J. Aron & Co. unit, according to data compiled by Bloomberg.

Melissa Cohlmia, a spokeswoman for Wichita, Kansas-based Koch, didn’t return a phone message left at her office.

Petrobras, Lukoil

Foreign oil producers such as Rio de Janeiro-based Petroleo Brasileiro SA and Lukoil OAO of Moscow may also use U.S. refinery acquisitions to gain footholds in the world’s largest gasoline market, IHS’s Parry said. Petrobras, as the Brazilian oil company is known, expanded its ownership stake in a Pasadena, Texas, refinery to 100 percent in 2009. Lukoil has owned more than 1,000 U.S. filling stations since purchasing Getty Petroleum Marketing Inc. in 2001.

Sophie Gates, a spokeswoman for Petrobras’s U.S. unit, didn’t immediately return a telephone message left at her Houston office. George Wilkins, a spokesman for Lukoil’s U.S. business, didn’t immediately return a phone message.

Companies with facilities along the U.S. Gulf Coast and the Midwest will command more suitors and better prices than European refineries that aren’t as adept at handling the cheapest, dirtiest grades of crude, according to IHS’s Parry.

Tesoro, the operator of plants from North Dakota to Hawaii, was named a takeover target at least 13 times from 2007 through 2010 by electronic news services, brokerages or newspapers, according to data compiled by Bloomberg. Including net debt, the San Antonio-based company trades at 4.8 times estimated Ebitda for 2011, the lowest valuation of any U.S. refiner with a market capitalization of more than $1 billion, the data show.

Relative Value

That’s also 28 percent less than the median Ebitda multiple of 6.7 paid in acquisitions of global oil refining companies in the past five years, data compiled by Bloomberg show. Tesoro is rated B3L by Bloomberg’s Company Credit Ratings, the lowest investment grade level, and BB+, one step below investment grade, by Standard & Poor’s.

“It’s longstanding Tesoro policy not to comment regarding strategy and/or mergers and acquisition conjecture which may or may not have relevance to our strategies,” Mike Marcy, a spokesman for the refiner, said in a telephone interview.

Tesoro’s net income may reach $261.7 million this year, compared to losses of $29 million in 2010 and $140 million the year before, analysts’ estimates compiled by Bloomberg show.

“Just as all these companies are putting refineries up for sale, refining is actually becoming a good business again,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc. in Houston.