California could be PBF’s biggest refinery challenge yet

Link to article: https://stillwaterassociates.com/california-could-be-pbf-biggest-refinery-challenge-yet/

October 1, 2015

by Kristen Hays, Reuters

PBF Energy Inc.’s purchase of Exxon Mobil Corp.’s California refinery marks Chairman Tom O’Malley’s biggest bet yet on U.S. refining in the country’s toughest market.

The $537.5 million deal to buy Exxon’s 155,000 barrels per day plant in Torrance with dock, storage and pipeline infrastructure will mark PBF’s entrance into the market in California, where refiners spend more to make a required boutique gasoline blend and face stronger emissions regulations than anywhere else in the country.

The state is also isolated without good pipeline connections to the rest of the country. So it is increasingly dependent on costlier foreign crude imports as output in California and Alaska decline, putting California refiners at a disadvantage relative to U.S. peers who can easily tap domestic oil.

O’Malley, a legendary refiner, formed PBF in 2008 to buy U.S. refineries and started with two in Delaware and New Jersey that Valero Energy Corp. wanted to shed. East Coast refiners struggled, and some shut down, stuck with paying more for imports while peers in the Midwest and Gulf Coast reaped big profits on cheap and accessible shale oil.

But the rise of crude-by-rail after his acquisitions let PBF and other surviving East Coast refiners tap that inland bounty and reduce reliance on imports.

California is a far different animal. Besides the costly mandated gasoline blend and a cap-and-trade system to cut emissions, talk of expanding oil-by-rail draws vehement opposition that grows with every new fiery crude train crash.

“There is definitely a lot of pushback in California,” said John Faulstich of refining consultancy Stillwater Associates.

That opposition spreads north to Vancouver, Washington, where Tesoro Corp. wants to build a 360,000 bpd railport to load railed-in crude onto vessels to supply West Coast refineries, mainly in California.

But even with those issues, Torrance likely was still attractive, experts said.

PBF is opening its checkbook wider for Torrance than it has for any other refinery. At $537.5 million for the 155,000 barrels per day plant, PBF is paying $34.67 a barrel – more than $16.72 a barrel it agreed in June to pay for Exxon’s joint-venture 192,500 bpd refinery in Chalmette, Louisiana.

Tesoro paid $1.18 billion in 2013 for BP Plc’s 26,000 bpd refinery – or $44.36 a barrel – but that included a dock capable of handling the biggest oil tankers, storage tanks, pipelines and retail assets. Associated Torrance assets are similar, but do not include retail.

Torrance, when running, “is a gasoline beast,” Credit Suisse analyst Ed Westlake said in a note to investors. The refinery provides about one-fifth of Southern California’s gasoline supply – and 10 percent of the entire state.

“Having that sort of market potential is probably something that’s enticing them a lot more than any regulatory barriers,” said Ryan Eggers, supervisor of the transportation fuels unit at the California Energy Commission.

Refining margins have been strong on the West Coast this year – largely because Torrance has been out of the mix, hobbled by a February explosion.

Tesoro Corp., for example, pocketed $16.73 in profit per barrel of refined products in the second quarter, up from $12.37 per barrel in the same period in 2014.

“If you were operating in California this year and you weren’t Exxon, you made a ton of money,” Faulstich said.

Exxon aims to fix the equipment at Torrance, and sources familiar with the plant say the company aims to have the work done by mid-February – a year after the blast.

PBF said the plant would be “restored to full working order” by the time the deal closes in the second quarter 2016.

(Reporting by Kristen Hays; Editing by Terry Wade and Michael Perry)

Categories: Mergers and Acquisitions, News