2nd UPDATE:Holly Agrees To Buy Sunoco Tulsa Refinery For $65 Million
April 16 2009 - 12:35PM
Dow Jones News
Sunoco Inc. (SUN) has agreed to sell its Tulsa, Okla., oil
refinery to Holly Corp. (HOC) for $65 million, a price tag that
represents a steep decline in asset values amid an industry
slump.
Sunoco put the 85,000-barrel-a-day refinery up for sale in 2008
and in December disclosed that it would convert the facility into
an oil product terminal if it couldn't find a buyer.
Last year's skyrocketing crude oil prices - refiners' biggest
cost - and weakening demand for useful products such as gasoline
and diesel hit the sector's earnings after several years of
historically high returns. Notional values of refining assets had
plummeted, but buyers and sellers were having difficulty agreeing
on prices. Thursday's announcement shows that a consensus is
emerging, which may open the door to more transactions this
year.
"If I was to pick who I thought did better, Holly didn't pay a
lot for it," said Phil Weiss, an analyst with Argus Research. "They
saw it as an opportunity to expand their business in a time when
assets are cheap."
Holly paid almost half as much per barrel, adjusted for the
complexity of the refinery, as Alon USA (ALJ) paid for the Krotz
Springs, La., refinery last year. In fact, Tulsa's price tag takes
us back to what refineries were selling for in the 1990s, said
analyst Ann Kohler of Caris and Co.
Under the deal, which is expected to close June 1, Dallas-based
Holly agreed to invest in upgrades necessary to meet environmental
protection requirements, including installing a distillate treating
system and sulfur-recovery unit. The divestiture also includes
inventories of petroleum products, which will be priced at market
value at closing.
Holly said constructing the unit that would produce ultra-low
sulfur diesel would cost $150 million. Philadelphia-based Sunoco
had estimated upgrades to the refinery would cost more than twice
as much.
Holly said it will pay for the refinery as well as the upgrades
using a $300 million credit facility it recently secured.
Holly has a history of being able to find lower-cost ways to
upgrade refineries, analyst Jacques Rousseau with Back Bay Research
wrote in a note to clients Thursday morning.
The deal is also made possible by the fact that Holly believes
the Environmental Protection Agency will grant it a one-year waiver
allowing it to continue selling high-sulfur diesel while it
installs the new equipment. By 2010, U.S. refiners are required to
lower the sulfur content of highway diesel by 97%.
The refinery, which started production in 1913, became part of
Sunoco's portfolio through a merger with Sunray DX in 1968. Unlike
the situation at many U.S. refineries, employees of the Tulsa plant
aren't represented by the United Steel Workers union, which was
successful in bargaining for higher pay this year despite the
recession.
The crude and product slate at the refinery won't change much
under Holly's ownership.
Sunoco shares recently traded 0.50% lower at $27.63. Holly's
stock traded 3.4% higher at $21.81.
-By Susan Daker, Dow Jones Newswires; 713-547-9206;
susan.daker@dowjones.com
(Jessica Resnick-Ault and Kerry E. Grace contributed to this
article.)