Tesoro Eyes Permian Basin in Deal to Buy Western Refining

Tesoro Corp. agreed to buy Western Refining Inc. for about $4.1 billion in a deal that positions the oil refiner to take advantage of crude production growth in the prolific Permian Basin.

After the purchase, Tesoro will become the fourth-largest independent U.S. refiner with a capacity of more than 1.1 million barrels a day, accounting for about 6 percent of U.S. crude-processing capacity, the companies said in a joint statement Thursday. Western’s assets will expand Tesoro’s network of midstream and retail assets across the Southwest and Mid-Continent regions.

The deal gives the company the opportunity to be a "significant player in the Permian Basin," said Chief Executive Officer Greg Goff during a conference call. The shale play, which straddles West Texas and New Mexico, is one of the few places where drilling is profitable at current prices. Drillers have flocked to the region, which has been a hotbed for deals this year. Combining with Western gives Tesoro a presence in the play, where it previously was absent.

Western’s shares soared as much as 27 percent to $38.80, the highest intraday since Jan 12. Tesoro was up as much as 5.6 percent to $90.54, the highest intraday since March 30.

The transaction gives Tesoro "attractive exposure to the Permian where the majority of crude production growth is expected to be focused going forward," said Jeff Dietert, an analyst at Piper Jaffray & Co., in a note.

The takeover may help Tesoro prop up its margins as the industry braces for a drop-off after two years of strong profits. The benchmark U.S. refining margin has fallen to about $12 a barrel from a peak of more than $30 in early 2015. In the third quarter, Western’s gross refinery margins were $12.02 a barrel while Tesoro’s were $9.08.

“We’re at the bottom of the refining cycle so valuations are low,” Gurpal Dosanjh, an analyst for Bloomberg Intelligence, said by phone Thursday. “This is the best time to be buying companies.”

Tesoro will acquire Western Refining at an implied price of $37.30 a share, a 22 percent premium to Wednesday’s closing price. Western shareholders can elect to receive 0.435 share of Tesoro for each share of Western stock they own, or take cash in lieu of stock up to 10 percent of the total equity consideration.

The enterprise value is $6.4 billion, including about $1.7 billion of Western debt and the $605 million market value of a non-controlling interest in Western Refining Logistics LP, according to the statement. The combined companies will deliver $350 million to $425 million of annual cost savings within two years.

The transaction is expected to close in the first half of 2017, subject to regulatory and shareholder approvals.

Goldman Sachs Group Inc. acted as financial adviser to Tesoro on the deal, while Sullivan & Cromwell LLP provided legal advice. Barclays PLC advised Western, and Davis Polk & Wardwell LLP was the company’s legal counsel.

— With assistance by Jim Polson, and James Herron