In another significant move toward consolidation in the U.S. downstream sector, independent Tosco Corp., Stamford, Conn., has signed a letter of intent with El Segundo, Calif., major Unocal Corp. to purchase Unocal's West Coast refining/marketing division.
Tosco will pay $1.4 billion for Unocal's 76 Products Co. operating fixed assets. It also will purchase about $400 million in inventories at closing and pay a portion of Unocal's environmental liabilities.
Another aspect of the deal would allow Unocal to collect as much as $250 million in profit-sharing payments from Tosco the next 7 years, if there are substantial improvements in retail margins for California gasoline.
Tosco No. 1 independent
The deal positions Tosco to become the largest independent refiner in the U.S., with total refining capacity of more than 950,000 b/d.
It also virtually removes Unocal from the downstream sector, apart from its Uno-Ven joint venture with Venezuelan state petroleum conglomerate Petroleos de Venezuela (Pdvsa).
Assets to be acquired in the deal include Unocal's 130,000 b/d Los Angeles refinery, 77,000 b/d San Francisco refinery at Rodeo, Calif., and 44,000 b/d Santa Maria refinery at Arroyo Grande, Calif.
Tosco currently owns refineries with about 700,000 b/d combined capacity at Ferndale, Wash., Avon, Calif., Linden, N.J., and Trainer, Pa.
The transaction also positions Tosco to become one of the nation's largest independent marketers and the third largest gasoline retailer in California, according to Thomas D. O'Malley, the company's chairman and chief executive officer.
All told, Tosco will acquire 1,350 76-branded stations in California, Arizona, Nevada, Oregon, Washington, and Hawaii, of which 1,100 are company-controlled. Tosco acquired the right to the Unocal logo and brand name.
Other assets in the deal include 13 storage terminals; three tankers; 1,500 miles of crude and products pipeline; Unocal's lubricants, commercial, and industrial petroleum products businesses; and Unocal's credit card system.
Tosco plans to fund the acquisition through a combination of debt and equity. Tosco has an option to give Unocal as much as $400 million in stock in lieu of cash.
The deal is expected to close by the end of first quarter 1997, pending approval of both boards, regulators, and shareholders.
Tosco gains
"The Unocal refining and distribution assets provide an extremely valuable complement to Tosco's existing West Coast system," said O'Malley. "The combination of Unocal's California heavy oil refineries with Tosco's existing West Coast refineries results in a very cost-effective network."
O'Malley said that Tosco's 165,000 b/d Avon refinery and Unocal's Rodeo refinery, about 10 miles apart in the San Francisco Bay area, "can complement each other by exchanging various intermediate streams, thus making each plant more profitable." Tosco also expects to benefit from surplus capacity at Unocal's Los Angeles refinery.
On the retail side, Tosco gains a new presence in Hawaii, in addition to expanding its presence in five West Coast states. Overall, Tosco expects retail sales of gasoline and diesel to reach 12 million gal/day after the acquisition, up from Tosco's sales of about 7.8 million gal/day at present. Tosco operates about 2,600 gasoline stations and sells gasoline through a network of about 1,500 jobbers and dealers, a company official said.
Specifically excluded from the newest deal is Unocal's tank farm and wharf at Avila Beach, Calif., where a remediation program is under way for contamination from pipeline leaks. Tosco agreed to share environmental cleanup costs at sites it will purchase, up to a cap of $200 million. Other operations excluded from the transaction include Unocal's Molycorp. Inc. carbon and minerals unit and the company's fertilizer plants.
In the refining sector, Unocal's sole remaining holding will be a 50% interest in the 143,350 b/cd Leman, Ill., refinery, operated with Pdvsa.
The deal continues a pattern of acquisitions for Tosco in the refining and marketing sector. Earlier this year, Tosco purchased 2,500 convenience stores from Circle K Corp., of which 1,900 sell gasoline (OGJ, Feb. 26, p. 32).
Other major acquisitions in recent years included BP Oil Co.'s U.S. Northeast refining and marketing assets (OGJ, Feb. 12, p. 26), Exxon's Bayway refinery at Linden, N.J. (OGJ, Apr. 19, 1993, p. 29) and BP America Inc.'s retail gasoline marketing system in California (OGJ, Aug. 15, 1994, p. 44).
Unocal's new era
The transaction "will put Unocal on the threshold of a new era," said Unocal Chairman and Chief Executive Officer Roger C. Beach. "We will no longer be a domestic integrated oil company."
Beach said the sale will enable Unocal to concentrate on upstream ventures in high-return areas, including the Gulf of Mexico, Thailand, and Indonesia. Other areas of focus will include developments off Myanmar and in the Caspian Sea, as well as pipeline projects in Turkmenistan, he said.
"In effect, we are divesting a 5% return-on-assets business and directing our future investment to growth projects that have a 15-20% return," Beach added.
Unocal expects to record a $375 million after-tax book loss from the sale of the assets, because the assets were carried on the books for more than the company will receive. Nevertheless, Beach said the company's financial position should improve as a result of the transaction. He hopes to move Unocal to an "A" credit rating by paying down $800 million in debt from the proceeds of the sale.
As part of the deal, Unocal positioned itself to recoup some of its $395 million investment upgrading its refineries to meet the stringent Phase II gasoline specifications mandated by the California Air Resources Board (CARB).
Tosco would pay a premium to Unocal for as long as 7 years, capped at $250 million, based on potential margin increases for the CARB fuel versus federal reformulated gasoline. "If margins stay flat, we will not get anything," Beach said. "It's just an upside sharing of possible improvement of margins."
Consolidation continues
The Tosco acquisition follows close on the heels of two other major proposed realignments in the U.S. downstream sector, as continued pressure on margins prompts refiners to cut costs and improve efficiency.
In September, Ultramar Corp., Long Beach, and Diamond Shamrock Inc., San Antonio, disclosed plans to merge, in a move the companies estimate will save at least $75 million/ year (OGJ, Sept. 30, p. 34). Last month, Shell Oil Co., Texaco Inc., and Saudi Arabian Oil Co. said they were discussing a possible refining/marketing alliance that one analyst predicted could yield pre-tax savings of $1 billion/year (OGJ, Oct. 14, p. 29).
Tosco's history as a low-cost operator makes the acquisition a "very positive" move for the company, said Frederick Leuffer, an analyst for Bear Stearns & Co., New York. "They typically change the terms of labor pacts and supply agreements and the way that service stations and terminals are run," Leuffer noted.
"Because there are many overlaps in the systems, they don't need to take on all of Unocal's expenses." He predicted that Tosco would be able to "substantially reduce" administrative and general expenses, in particular.
Leuffer also termed the deal a positive move for Unocal. "It's a win-win for both," he said. "Unocal will be able to focus on those areas where it has an edge over its competition."
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