BP’s Texas Refinery Sale Shows Volatile Industry’s Decay
BP Plc (BP/) may get less than half the $2.85 billion it planned for selling its Texas City refinery, the third-largest in the U.S., as values for U.S. plants haven’t kept pace with soaring profits.
The average price of U.S. refineries sold since 2009 indicates the plant should sell for $1 billion, data compiled by Bloomberg Industries show, a valuation that would be among the lowest in two decades. At a time when investors are enjoying the highest stock returns since 2007, BP would reap less than half of the $4.4 billion total value it estimated it would get when it put its Texas and Carson, California, plants up for sale last year, according to data compiled by Bloomberg.
Carl Icahn, Warren Buffett’s Berkshire Hathaway Inc. (BRK/B) and hedge fund Appaloosa Management LP have reaped returns of as much as 97 percent so far this year by investing in refiners benefiting from cheap North American crude. Asset values have stagnated as buyers shy away from the sector’s volatile history and the prospect of competition from new refineries being built in Asia.
“BP wants to sell it and they want to sell it by the end of the year, so if you’re a buyer, you’re going to think you’re in a good position,” said John Auers, senior vice president at Turner Mason & Co., a Dallas-based energy consulting firm. “BP would be thrilled with $2 billion, but if you’re a buyer, why not try half that? Whatever they bid, they’re not going to pay full price.”
Surging profits haven’t quieted doubts about the long-term viability of an industry facing declining demand in the U.S. and Europe and steep up-down cycles, said Harold York, a vice president for Wood Mackenzie Ltd. in Houston.
“We’re in a boom, but they are fearing the bust and they don’t know when it’s going to happen,” York said. “Buyers see refineries are profitable today, but long term, they don’t want to be losing money with an asset they can’t dispose of.”
Buyers fear that competition from new refineries planned in China, India and the Middle East may depress domestic prices and damp a burgeoning U.S. export business. As new pipelines including TransCanada Corp. (TRP)’s Keystone XL are built to ship oil from Canada and North Dakota to the U.S. Gulf Coast, U.S. crude prices are likely to rise, diminishing a key cost advantage for U.S. refiners and shrinking profits, York said.
Valero Energy Corp. (VLO), the largest independent processor of fuel in the U.S., has closely studied buying the refinery, according to a person familiar with the San Antonio-based company’s plans. Valero owns a 245,000 barrel-a-day refinery that is adjacent to the BP facility in Texas City. Combining the two plants would create the largest refinery in the U.S. The person spoke on a condition of anonymity as the talks aren’t public.
Valero and PBF Energy Inc. (PBF), a private equity-backed independent refiner run by former Philipp Brothers trader and refining magnate Thomas O’Malley, are the two most likely buyers, said Christian O’Neill, a Bloomberg Industries energy analyst. Marathon Petroleum Corp. (MPC), which also has a Texas City refinery, and Phillips 66 (PSX), which abandoned plans to sell one of its plants in Louisiana, may also be suitors given a potentially lower price, O’Neill said.
The Texas City refinery might be more attractive to independent refiners if they could buy the asset for a bargain price, then cash in on improving profits.
Marathon, Phillips 66 and Icahn-backed CVR Energy Inc. (CVI) surged to records this month as refiners continued to earn the highest profits since 2007, when the industry enjoyed a so- called “golden age” because of higher U.S. demand and fuel margins. Valero, which is up 49 percent this year, climbed on September 14 to its highest point in four years.
The rally has attracted investors such as David Tepper’s Appaloosa, which owned 2.3 million Valero shares as of June 30. Buffett’s Berkshire owned 27.1 million shares of Phillips, which has risen 42 percent since its April 30 spinoff from ConocoPhillips.
CVR Energy is up 97 percent after Icahn bought a stake in January and agitated for the company to put itself up for sale. Amid a proxy fight, he offered investors $30 a share and now holds an 82 percent stake in the company. CVR reached an all- time high of $37.66 on September 21 in New York.
The latest refining renaissance has been spurred by growing supplies of cheap U.S. oil. Crude prices have dropped as producers tap into new fields in North Dakota and Texas, allowing refiners to save money on every barrel of oil they turn into gasoline, diesel or jet fuel.
The margin between U.S. oil costs and fuel prices reached an average of $28.98 from April to June, the highest-ever second-quarter price, according to data compiled by Bloomberg.
At the same time, the value of the plants that process the fuel has reached historic lows based on an industry yardstick that compares the price at which a plant sells with how much it would cost to replace it, according to an analysis by Bloomberg Industries.
Plants have sold for about 12 percent of their replacement cost since 2009, which would result in a price of $1 billion for the refinery. The historical average is between 20 percent and 30 percent, according to data compiled by Bloomberg.
Analysts also use price per barrel of refining capacity to evaluate plant sales. Since 2009, 11 refineries have sold for an average of $3,128 a barrel, according to transactional data compiled by Bloomberg. On that basis, the refinery may have a price tag of $1.5 billion, leaving the company about $1.72 billion short of its $4.4 billion goal for the two refineries. The lower price may force BP to put other assets on the block, said Brian Youngberg, an analyst at Edward Jones in St. Louis.
BP initially expected its refineries to sell for more than the 10-year average of $6,000 a barrel of refining capacity, Iain Conn, the company’s head of refining and marketing, said in February 2011.
Last month, BP announced an agreement to sell its refinery and related assets in Carson, California for $1.18 billion, or about $4,417 a barrel of processing capacity. To reach the $4.4 billion target for the two plants, BP’s Texas City refinery would have to sell for $3.2 billion, more than double the average since 2009.
The Carson refinery sale and BP’s $5.55 billion divestiture of its stakes in a group of Gulf of Mexico fields last week raised to $32 billion the company’s total asset sales since 2010. The company aims to raise $38 billion from divestitures by the end of 2013 after a 2010 explosion at its Macondo well in the Gulf killed 11 workers.
“If BP does come up short, they’ll have to go farther down their list of assets to sell,” said Youngberg, who rates BP’s American Depository Receipts a hold and doesn’t own shares. “They’ve got to meet the guidance number they’ve provided for investors to get more comfortable.”
The history of BP’s Texas City plant, site of one of the most deadly refining accidents in 20 years, may be another deterrent to buyers, said Turner Mason’s Auers. BP pleaded guilty to a violation of the Clean Air Act and paid a $50 million fine. The company also paid $2.1 billion in settlements with blast victims. BP agreed in July to pay more than $13 million in additional fines and continues to negotiate with the U.S. Department of Labor about more than 20 remaining citations. BP spent $1 billion to upgrade production units and improve safety at the plant, the company has said.
“Refinery sales are challenging all over the world due to the economic slowdown we’re seeing in many markets,” said Gianna Bern, president of risk-management consultant Brookshire Advisory and Research, Inc. “This refinery is a tough sell for the associated liabilities that could go with it. That all manifests itself in a lackluster price tag.”
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