Exxon and PBF's California Love: Liam Denning

It takes a lot for Californians to love gasoline -- which largely explains why PBF Energy is buying a busted refinery in LA county from Exxon Mobil.

California, as you might expect, is different from the rest of the U.S. when it comes to gasoline. Tighter fuel standards, the vast Pacific Ocean, and the difficulty of building pipelines over the Rockies make the state, which is the largest gasoline market in the country, something of an island. And fuel on islands comes at a premium.

So while the national average conventional gasoline price has come down below $2.50 a gallon, according to the Energy Information Administration, it is still above $3 in California. In the decade through 2014, California’s gas premium averaged 10.3 percent. This year, it has soared to 28 percent.

That spike has much to do with the refinery in question, in Torrance. A fire there in February knocked out most of its capacity. Bad news for Exxon, but a boon for those refineries still running in a tighter, relatively isolated market.

Location really matters here, as southern California’s mismatch of supply and demand is even greater than further up the West Coast. Refineries in the south of the state and adjacent southern Nevada met only 87 percent of regional gasoline demand in 2013, according to a report published by the Energy Information Administration on Wednesday.

PBF, which will take possession of the refinery after repairs are completed, projects Torrance to make $360 million of annual Ebitda, implying a multiple of just 1.5 times. That assumes a benchmark crack spread using Alaskan crude of $15.50 a barrel, which looks reasonable set against average West Coast cracks of about $18 over the past decade.

Over the long term, California’s environmentalist bent doesn’t bode well for the state’s refiners. That’s perhaps one reason Exxon is selling, along with a desire to refocus its refining portfolio. 

But that hardly matters for now. The state’s drivers have been pumping 3 percent more gasoline this year compared with 2014, higher than the national average, according to the Lundberg Survey -- and that is despite those relatively higher prices. That’s some California love right there.

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