Tesoro to Buy California Refinery From BP for $1.18 Billion
Tesoro Corp. (TSO) agreed to buy BP Plc (BP/)’s California oil refinery and 800 gasoline stations in the Southwest for $1.18 billion, paying a below-average price for the facility as fuel costs soar in the region.
Tesoro, the largest independent refiner on the U.S. West Coast, will pay about $1.3 billion more for crude and other inventories at the Carson plant, according to a statement today from the San Antonio-based company. With the purchase, Tesoro will control 23 percent of California’s refining capacity, according to data compiled by Bloomberg.
Tesoro understands “the complexities and challenges of operating in California,” Chief Executive Officer Greg Goff said in the statement. “We are well positioned to generate significant operational efficiencies, increase our ability to satisfy market demand and reduce stationary source air emissions.”
The purchase will be Tesoro’s third plant in California, a market with emissions regulations that are more complex than those in other states. The Carson plant is next to Tesoro’s Wilmington refinery and the company projects it can save $250 million a year by combining the plants’ operations.
Tesoro rose 9.5 percent to $38.87 at the close in New York, its highest price since February 2008.
“The deal is cheap for Tesoro,” Fadel Gheit, a New York- based analyst at Oppenheimer & Co., wrote in an e-mail today. Gheit has an outperform rating on the company, the equivalent of a buy.
Excluding fuel, Tesoro said its cost for the refinery will be about $175 million after it sells associated pipelines and storage facilities to a master-limited partnership it controls. At that price, Tesoro would be paying about 15 percent of the refinery’s replacement value, compared to an industry average of 25 to 30 percent, John Auers, a vice president at Dallas-based petroleum consultant Turner, Mason & Co., said in a telephone interview today.
Tesoro said it’s paying half of what Holly Corp. paid for a Tulsa refinery in 2009, on a per-barrel basis adjusted to reflect the plant’s ability to convert crude to high-value products like gasoline. Auers said the geographic differences between the plants may have driven up the price of mid-continent refineries.
The long-term outlook for California refineries has been dim because of environmental regulations and dropping demand for gasoline, Auers said.
Last week, a fire at Chevron Corp. (CVX)’s Richmond refinery curbed output from Northern California’s largest plant, boosting the region’s fuel prices. Tesoro sold unbranded, California- blend gasoline in the San Francisco area for $3.40 a gallon on Aug. 10, up 13 percent from its price before the fire, according to data compiled by Bloomberg.
The fire could double Tesoro’s cash flow for as long as a year, Paul Sankey, an analyst at Deutsche Bank in New York, said in an Aug. 7 note.
Tesoro’s Golden Eagle plant in Martinez, California, has a capacity of 170,000 barrels a day and the Wilmington refinery has a capacity of 97,000 barrels a day, according to data compiled by Bloomberg. The company will have 533,000 barrels a day after buying the Carson refinery.
The purchase may improve Tesoro’s access to lower-cost crude and feedstocks for its refineries. BP has the only dock on the West Coast that can accommodate very large crude carriers, which will allow Tesoro to bring a wider variety of crude in, Goff said on a conference call with analysts today. The Carson facility currently processes oil from Alaska’s north slope and fields outside the U.S.
“We believe there are a lot of opportunities out there to improve the cost of crude to the refinery,” Goff said.
Tesoro will save money by shipping its gasoline and diesel on BP’s pipeline network and may sell capacity on the system to third parties, he said.
The acquisition is the first since Goff joined Tesoro from ConocoPhillips (COP) in 2010. The purchase is expected to close by the middle of next year, the company said. Tesoro will sell the storage and pipeline assets to Tesoro Logistics LP (TLLP) after the deal closes. Tesoro is buying Arco-branded gasoline stations in California, Arizona and Nevada from BP.
BP, based in London, previously announced its intent to sell the California refinery as well as a plant in Texas City, Texas as part of a plan to shed $38 billion of assets by the end of next year. The transaction announced today brings the total amount of BP asset sales to $26.5 billion since the start of 2010.
“This is a decent price, though a bit less than we thought they might get,” said Jason Gammel, an analyst at Macquarie Capital Europe Ltd. in London. “This a minor positive for BP. It provides some liquidity that they can reinvest. It’s been a long time in the making, so it’s good to see them get it done.”
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