BP Plc (BP/) agreed to sell its Texas City refinery, site of one of the deadliest U.S. industrial accidents in 20 years, to Marathon Petroleum Corp. (MPC) for at least $598 million in cash, less than BP planned for the deal last year.
Marathon Petroleum may pay as much as $700 million more during the next six years depending on the plant’s profitability, the Findlay, Ohio-based refiner said in a statement today. With the $1.2 billion paid for inventories of oil and other products at the 451,000 barrel-a-day refinery, London-based BP may eventually collect a total $2.5 billion in the transaction.
Excluding the value of pipelines and a power generation facility, the base price paid for the Texas City refinery represents the lowest plant valuation since at least 1993, according to data compiled by Bloomberg Industries. The plant was expected to fetch more than the 10-year-average of $6,000 a barrel, or $2.85 billion, BP’s head of refining and marketing, Iain Conn said in 2011.
“Marathon is picking this up for a song,” Gianna Bern, president of risk-management consultant Brookshire Advisory and Research, Inc. in Chicago, said today in a telephone interview. Marathon Petroleum rose 5.6 percent to a record $57.92 at the close in New York.
Buyers were probably turned off by the plant’s history, Bern said. In 2005, 15 workers were killed and hundreds injured at the refinery when a unit used to boost octane in gasoline overflowed as it was being restarted, igniting a blast that shattered windows five miles away.
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 and spent $1 billion upgrading the refinery. Three years of criminal probation for the company over the accident ended March 12. BP agreed to retain liability from any pending litigation and to pay any fines from regulators, Marathon Petroleum Chief Executive Officer Gary Heminger said today in a conference call.
The company, which was spun off last year from Marathon Oil Corp. (MRO), will buy the refinery, three pipelines originating at the plant, four terminals, a shipping agreement, retail marketing contract agreements and a cogeneration facility, which can lower costs by generating power from the steam the refinery produces.
The transaction is expected to close in early 2013, pending regulatory approvals.
Marathon Petroleum expects the refinery to immediately boost its profit, reaping $700 million to $1.2 billion in earnings before interest, taxes, depreciation and amortization. Marathon already owns an 81,500 barrel-a-day refinery in Texas City, Texas, about 40 miles (65 kilometers) from Houston.
The company will pay for the transaction with cash on hand, according to the statement. The $700 million provision requires Marathon Petroleum to pay BP half of the refinery’s annual profits above a threshold of $1.65 billion a year, with a maximum of $200 million to $250 million a year over the next six years.
BP is likely to receive the additional $700 million unless the refining industry is hit with another collapse in profit margins similar to the one in 2008 and 2009 caused by the economic recession, said Brian Youngberg, an analyst at Edward Jones in St. Louis.
BP’s Texas City plant, which will become Marathon Petroleum’s seventh oil refinery, will increase the company’s presence on the Gulf Coast. When the deal closes, Marathon will have the ability to process 1.64 million barrels a day of crude, about 57 percent of which will be on the U.S. Gulf Coast.
“Marathon got a very good price on the facility,” Youngberg said. “There was limited interest out there given its history, and a lot of other potential buyers have significant interests in the Gulf Coast already.”
Marathon Petroleum’s other refineries are primarily in the Midwest, where refiners have earned record profits since 2011 as lower crude prices in the region allowed them to spend less on every barrel they purchased to feed their plants.
The sales of BP’s Texas City and Carson, California, refineries and $5.55 billion divestiture of its stakes in a group of Gulf of Mexico fields last week raises to $34 billion the company’s total asset sales since 2010. The company aims to raise $38 billion from sales by the end of 2013 after a 2010 explosion at its Macondo well in the Gulf killed 11 workers and caused the worst offshore U.S. oil spill.
“BP’s asset sales program has gone well,” said Stuart Joyner, an analyst at Investec Securities Ltd. in London. “I’d be surprised to see them not hit the $38 billion target ahead of schedule.”
Joyner said in an interview he expected a price tag of about $800 million for the refinery.
“BP’s original expectations were pretty lofty, but the market anticipated a price in the ballpark of what they got today,” Youngberg, of Edward Jones, said today in a telephone interview. “It’s a positive for BP in that they got it sold, but they definitely sold it at a discount.”
Marathon Petroleum received legal counsel from Jones Day. BP was advised by Vinson & Elkins LLP, its primary counsel, Kirkland & Ellis LLP and Greensfelder, Hemker & Gale.
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