April 16 (Bloomberg) -- Holly Corp., the owner of oil refineries in Utah and New Mexico, will buy Sunoco Inc.’s plant in Tulsa, Oklahoma, for $65 million to increase output more than 60 percent.

The purchase and a $150 million upgrade for low-sulfur diesel will be financed with cash on hand, cash from operations and a $300 million credit line, Dallas-based Holly said today in a statement. The price for the plant’s inventory will be settled at closing, expected June 1.

Acquisition of the 85,000 barrel-a-day plant accelerates expansion by Holly. The company increased capacity at its two refineries 19 percent to 131,000 barrels daily in recent months. As part of the deal, Holly agreed to refit the Tulsa refinery to produce low-sulfur diesel by the end of 2011. Sunoco had rejected an upgrade as too costly before putting the refinery up for sale.

“It’s always nice to add capacity and it’s better to do it at the bottom of the cycle than at the top,” Ann Kohler, a New York-based analyst for Caris & Co., said in an interview. She rates both stocks “below average” and owns neither. “Holly got it for a very low price compared with recent transactions.”

Holly rose $2.13, or 10 percent, to $22.23 in New York Stock Exchange composite trading, the biggest one-day gain since Jan. 16. The shares have jumped 27 percent this year. Sunoco rose 55 cents, or 2 percent, to $28.32 is down 35 percent this year.

Planned Closing

Philadelphia-based Sunoco said in December the refinery would shut and its tanks would be converted to a terminal unless a buyer was found. Sunoco put the refinery, its smallest, up for sale after deciding against a $400 million upgrade and expansion to produce low-sulfur fuels in November 2008.

“Holly does have a history of being able to find lower- cost solutions at its refineries to meet requirements,” Jacques Rousseau, an analyst for Back Bay Research and Soleil Securities, wrote today in a note to clients. “We would expect the total upgrade costs to be significantly lower than Sunoco’s estimate.”

Holly raised processing capacity 19 percent to 31,000 barrels daily in the fourth quarter at its Woods Cross refinery in Utah and this year enlarged its Navajo refinery in New Mexico to yield 100,000 barrels a day, an 18 percent increase.

‘Economies of Scale’

“They will be able to bring to bear some economies of scale because of their work in the not-too-distant past,” Jim Byrne, a Calgary-based analyst for BMO Capital Markets, said in an interview. Byrne rates Holly “market perform,” Sunoco “underperform” and owns neither.

The sale “represents another step toward improving our performance and competitiveness,” Sunoco CEO Lynn Elsenhans said in a separate statement. “It also keeps the refinery operating, provides for necessary upgrades to ensure the long- term viability of the facility, and protects approximately 400 jobs.”

Holly will also receive Sunoco’s North American specialty- lubricants trademarks and related licenses for Central and South America.

The average margin on processing three barrels of crude into two barrels of gasoline and one of heating oil rose 3.9 percent to almost $11 a barrel in the first quarter of 2009.

The Tulsa refinery opened in 1913 and was acquired by Sunoco in 1968.

To contact the reporters on this story: Nidaa Bakhsh in London at nbakhsh@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: April 16, 2009 16:31 EDT