By OGJ editors
HOUSTON, Jan. 15 -- Premcor Inc., Old Greenwich, Conn., agreed to buy Motiva Enterprises LLC's Delaware City refining complex—Delaware's only refinery—for $800 million, plus the value of petroleum inventories at closing.
The purchase price was $435 million and the assumption of $365 million of tax-exempt bonds from the Delaware Economic Development Authority. Worth of the petroleum inventories is estimated at $100 million.
Premcor Chairman and CEO Thomas D. O'Malley said, "This will give us meaningful entry into the attractive, product-short Northeast market. The refinery is capable of processing heavy-sour and high-acid crude oils, which typically sell at a substantial discount to the benchmark WTI (West Texas Intermediate) crude oil."
The 175,000 b/cd refinery, 15 miles south of Wilmington, is capable of meeting US Environmental Protection Agency low-sulfur fuel specifications with a modest investment, he said, adding that ithe acquisition will be, "immediately and significantly accretive to Premcor's after-tax earnings per share and cash flow."
An independent refiner and marketer of unbranded fuels and heating oil, Premcor already owned three refineries. They are the 237,500 b/cd refinery in Port Arthur, Tex., the 190,000 b/cd refinery in Memphis, Tenn., and the 165,000 b/cd refinery in Lima, Ohio.
The Delaware City refinery will enable Premcor to increase its total crude oil processing capability by 30%, O'Malley said.
Subject to regulatory approvals and the transaction's finalization, closing is expected during the second quarter.
Motiva is a joint venture owned 50-50 by Shell Oil Products US and Saudi Refining Inc. Motiva and Shell are based in Houston. The Delaware City refinery began production in 1957 as part of the Tidewater Oil Co.' refining system.
The sale marks Shell's latest divestment of US assets. Last year, Shell sold crude pipelines and storage to Enbridge Energy Partners LP for $131 million (OGJ Online, Dec. 29, 2003) and to Plains All-American Pipeline LP for $4.4 million (OGJ Online, Dec. 18, 2003).
Assets include cogen plant
The Delaware City's complex includes a fluid coking unit, a fluid catalytic cracking unit, a hydrocracking unit with a hydrogen plant, a continuous catalytic reformer, an alkylation unit, and several hydrotreating units.
Gasoline, low-sulfur diesel, home heating oil, and jet fuel are sold in the US Northeast via pipeline, barge, and truck distribution. The refinery's petroleum coke production is gasified to fuel the cogeneration facility, which supplies electricity and steam to the refinery and third parties.
Besides the refinery, the transaction includes a coke gasification plant that produces 2,400 tons/day and a 160-Mw cogeneration facility on a nearby, separate complex. Premcor will evaluate whether to sell these facilities, O'Malley told analysts and reporters in a conference call Thursday.
Refining outlook
The transaction's terms also include a contingency purchase provision that could add another $125 million total to the value of the deal depending upon industry refining margins for 3 years and gasifier performance for 2 years.
O'Malley said the US market has transformed reformulated gasoline from a commodity into a specialty chemical, adding that he believes most analysts' estimates of refining margins are too low.
"This is truly keyed up to be the golden age of this industry," O'Malley said, adding he believes "extraordinary results" are possible through the end of the decade.
Analysts' reaction
The Houston-based Sanders Morris Harris Group issued a research statement saying that its analysts "applaud the diversification of Premcor's refining base into the East Coast markets with a fourth refinery. Yet, we are troubled by the complexity of the deal and the magnitude of all the moving parts of the financing, which amounts to nearly $1 billion in equity, debt assumptions, payouts, and inventory purchases."
Prudential Equity Group Inc. analyst Andrew F. Rosenfeld agreed with O'Malley that only "modest" capital expenditures will be needed for the Delaware City refinery to meet low-sulfur US fuel specifications.
Rosenfeld doubts that any regulatory issues will arise because Premcor does not own any East Coast refineries.
"We have assumed that the refinery will be able to capture margins somewhat higher than a light sweet crude refinery operating in the region due to the lower priced heavy crude. In addition, we believe the refinery will experience lower operating expenses than a heavy crude refinery due to the gasification and cogeneration facilities," Rosenfeld said.
Moody's Investors Service said the A1 long-term debt and Prime-1 ratings of Motiva Enterprises LLC remain under review for possible downgrade.
On Jan. 12, Moody's placed Motiva's debt ratings under review for downgrade in conjunction with the review for downgrade of 50% owner Shell Oil Co.'s Aa1 long-term rating and the Aaa long-term ratings of guaranteed funding conduits of the Royal/Dutch Shell Group.
Those reviews were prompted by the Shell's reclassification of some 3.9 billion boe of proved reserves, of which over half were in Nigeria and Australia (OGJ Online, Jan. 9, 2003). The Australia portion involved Gorgon gas fields, which are linked with an LNG project.