Sunoco Oil Refinery Sale Crack In The Ice, No Thaw
April 16 2009 - 5:10PM
Dow Jones News
The oil refinery deal between Sunoco Inc. (SUN) and Holly Corp.
(HOC) is unlikely to trigger a string of similar transactions, even
though it signals that asset values have hit a 15-year low.
Sunoco has agreed to sell its Tulsa, Okla., refinery to Holly
for $65 million, a price tag that covers the cost of an oil product
terminal and land but barely takes the refinery units into
account.
The deal values the facility at $228 per complexity barrel, an
indicator used by analysts to compare deals on a standardized
basis. By this measure, the Tulsa plant's valuation is less than
half of that for a Louisiana refinery, which was sold in July 2008
before the credit crisis reached fever pitch and the global
economic downturn came into full force. Today's valuation for
Sunoco's Tulsa refinery is well below that seen for refining assets
at their high in 2007 and more in line with 1990's prices.
Even with these low prices, which come on the back of weak
profits, there's a reluctance to strike deals. After several years
of historically high margins, the refining sector began to slump in
late 2007 as crude oil prices, refiners' biggest cost, began their
meteoric rise and as demand for crude-derived products such as
diesel and gasoline fell. As in many other parts of the economy,
buyers and sellers have had difficulty agreeing on price,
effectively freezing the dealmaking landscape.
This time around, sellers have little incentive to take a
sub-par price for their refineries. In the 1990s, refineries were
often sold to comply with antitrust regulations as oil companies
merged. Without this catalyst, refiners are likely to wait out the
downturn and hold onto their refineries, even underperforming
ones.
Buyers, too, may be reluctant to do deals, even in a market that
favors them. Many refiners, like companies in many other
industries, are holding tight to cash reserves. Plus, those with
cash on hand say there aren't many must-have assets for sale.
The Tulsa refinery has long been considered to be a bottom tier
refinery, and it's unlikely that other refineries will sell at a
lower price per barrel than this one. The plant requires at least a
$150 million investment to comply with environmental regulations.
The refinery produces a limited slate of products and doesn't have
access to a wide range of crude supplies that proximity to an ocean
port would offer. However, it's near the oil hub of Cushing, Okla.,
which currently has an oversupply of crude oil on offer, although
that's not always the case.
Last year, Sunoco put the 85,000-barrel-a-day refinery up for
sale and by December disclosed that it would convert the facility
into an oil product terminal if it couldn't find a buyer.
That announcement made the refinery ripe for lowball offers.
Other refineries up for sale, including Valero Energy Corp.'s (VLO)
in Aruba and Western's Refining Inc. (WNR) Yorktown, Va., should be
able to fetch a better price simply because those companies aren't
compelled to sell.
A threat of a refinery closure from Exxon Mobil Corp. (XOM) in
1992 allowed formerly independent refiner Tosco Corp. to purchase
the largest refinery in the U.S. East Coast at a price that set the
floor for refinery assets at the time. That deal encouraged other
independent refiners to go on buying sprees as integrated oil
companies tried to sell off their plants.
Holly's purchase is similar to Tosco's, said IHS Herold analyst
John Parry.
"It should tend to lower seller's expectations for what they can
get," Parry said.
-By Susan Daker, Dow Jones Newswires; 713-547-9208;
susan.daker@dowjones.com