O’Malley Plans U.S. IPO After Wrong Way Bet on Petroplus: Energy

Thomas O’Malley made two fortunes buying U.S. oil refineries at rock-bottom prices and selling when the economy rebounded. On the third try, in Europe, the 70- year-old ex-Salomon Brothers Inc. oil trader got it wrong.

Petroplus Holdings AG, the Swiss refiner that sought protection from creditors last month, spent $2.5 billion buying plants in the U.K., Germany and France after O’Malley took it public in 2006. Its collapse after profit margins plunged hasn’t diminished the refining veteran’s appetite as he prepares for a similar initial public offering in the U.S.

PBF Energy Co., formed in 2008 with private-equity backers Blackstone Group LP (BX) and First Reserve Corp., said Nov. 14 that it’s planning a share sale. Petroplus netted its backers six times their initial investment even as O’Malley himself held on to stock for years after their exit.

“O’Malley’s strategy could work in the U.S. or Asia, but Europe is a completely different market,” Martin Schreiber, an analyst at Zuercher Kantonalbank in Zurich, said in an interview. “The whole refining industry in Europe is suffering from overcapacity and weak demand.”

PBF Energy snapped up two plants from Valero Energy Corp. (VLO) in 2010. It bought the Delaware City, Delaware refinery for $220 million and the Paulsboro plant in New Jersey for about $360 million and an estimated $275 million for crude inventory and other expenses. The same year it purchased Sunoco Inc.’s Toledo refinery in Ohio for about $400 million.

Profitable Venture

PBF Energy is a profitable venture, said Timothy Day, managing director for backer First Reserve. In its November registration filing, the company said that it had hired Citigroup Inc., Morgan Stanley, Credit Suisse Group AG and Deutsche Bank AG as bookrunners for its IPO. It didn’t give any details about the number of shares that will be sold or the price range.

Carlyle Group LP and Riverstone Holdings LLC, the private equity firms that hired O’Malley at Petroplus and sold after the IPO, made six times their initial investment. O’Malley remained a shareholder at least until the end of 2010, company filings show.

The failure of Petroplus, which lost $9 billion of market value since 2007, capped years of declining margins in Europe for turning crude into diesel, gasoline and petrochemicals. Add to that the economic slump and O’Malley’s refusal to follow the lead of major oil companies.

Refining Margins

BP Plc, Royal Dutch Shell Plc, Chevron Corp. and Exxon Mobil Corp. cut capacity in the region by selling plants or converting them to storage terminals in the past decade. BP’s refining indicator for northwest Europe, a measure of profitability, fell to about $12 a barrel in the fourth quarter from above $21 a barrel in the second quarter of 2008.

“Had the European economy stayed strong, O’Malley would have done better,” said John Parry, an analyst at IHS Herold in Norwalk, Connecticut. “He just ran into the brick wall of a world financial meltdown. Banks were holding back funding, and independents don’t have deep pockets like the majors.”

O’Malley, who started in Salomon Brothers’s mailroom, served as Petroplus’s chief executive officer from 2006 to 2008 and resigned as chairman last year.

At the end of 2010, he still held 2 million Petroplus shares that traded as high as 123 Swiss francs ($134) in 2007. Petroplus closed at 1.16 francs today, compared with a low of 16 centimes the week it announced insolvency plans.

O’Malley declined to comment on Petroplus’s insolvency or on his current holdings in the company.

Spokesmen for Carlyle and Petroplus also declined to comment.

Failed Strategy

When Carlyle and Riverstone sold their stakes in Petroplus, they left money on the table. Shares peaked at double the IPO price from eight months earlier and about 40 percent higher than when the backers sold their remaining shares.

O’Malley’s strategy of bolstering refinery capacity failed to work in Europe as rising oil prices shaved profit margins and fuel demand stopped growing. As Europe’s debt crisis held back economic recovery, it became clear there would be no repeat of his first two ventures: selling Tosco Corp. to Phillips Petroleum for $8.4 billion in 2001 and Premcor Inc. to Valero Energy Corp. for $10.8 billion four years later.

At Premcor, he bought plants to build refining capacity of as much as 790,000 barrels a day before selling in a deal that earned private equity firm Blackstone a profit of more than $1 billion.

Private-equity firms typically fund acquisitions with more than half of debt to maximize returns and sell the assets back typically within three to five years. They charge about 1.5 percent of assets they manage to cover their expenses, and 20 percent of the profits from investments as compensation, or carried interest. Carlyle is looking to do an IPO this year.

No ‘Sell’

When Petroplus’s lenders pulled the plug on $1 billion of credit lines at the end of December, none of the 10 investment banks following the stock rated Europe’s largest independent refiner a “sell.” The insolvency also constituted a default on $1.75 billion of senior and convertible bonds.

Carlyle bought Petroplus in April 2005 for 278 million euros ($362 million) plus 366 million euros of assumed debt, delisting the company in Amsterdam. In 2006, it hired O’Malley and Petroplus listed again on the SWX Swiss Stock Exchange.

Carlyle divested a 63 percent stake in the initial public offering for 2.9 billion francs in November 2006, more than six times what it paid for the business less than two years earlier. Carlyle sold the rest of its holding in February 2007.

O’Malley followed the same script in Europe that he had tried in the U.S. In 2007, Petroplus took on new debt and agreed to buy two French plants from Shell for $475 million to take advantage of higher fuel prices. Petroplus went on to buy BP’s Coryton, England, plant for $1.4 billion and an Exxon facility in Ingolstadt, Germany.

Klesch Interest

“It wasn’t private equity that went wrong,” said Mike Wright, a professor at Imperial College Business School in London. “When they’ve been out for that long, they can’t really be blamed for the failure. The failure rate of private equity deals isn’t significantly different from the failure of companies generally.”

Gary Klesch, chairman of commodity investment firm Klesch Group, said he’s now looking at buying three of Petroplus’s plants. He blamed the company’s debt for its problems.

“They became slaves to the master of the debt as opposed to investing in the assets,” Klesch said in a Bloomberg Television interview on Feb. 2. “If you don’t invest in a refinery, it results in underperformance.”

PricewaterhouseCoopers LLP, Petroplus’s administrator in the U.K., said it’s talking to several potential buyers of the assets and has arranged a crude delivery to keep Coryton running at reduced capacity.

“We hear rumors that there are some interested parties in the refineries,” said Zuercher Kantonalbank’s Schreiber. “I’m still wondering what the final value will be for shareholders.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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