U.S. refining mergers may peak this year

U.S. Refining Industry Restructures [47,167 bytes] The recent spate of mergers and joint ventures in the U.S. refining industry will increase this year then start to decline, predicts Chem Systems Inc., Tarrytown, N.Y. As the U.S. refining industry faces increasing competition domestically, companies are faced with a need to maintain market share and profit margins.

April 20, 1998

3 min read

U.S. Refining Industry Restructures [47,167 bytes]

The recent spate of mergers and joint ventures in the U.S. refining industry will increase this year then start to decline, predicts Chem Systems Inc., Tarrytown, N.Y.

As the U.S. refining industry faces increasing competition domestically, companies are faced with a need to maintain market share and profit margins.

U.S. refiners have recorded declining profits for at least 5 years-a condition that is forcing the industry to restructure its operations and seek consolidations, according to Bruce Burke, vice-president of Chem Systems' refining practice. In the past 5 years alone, nearly 45% of U.S. refining capacity has changed ownership.

More deals ahead

Burke is projecting an upward trend in the number of consolidations among refiners in 1998. He believes 20% of U.S. capacity, or 22 refineries, could change hands this year.

"Ownership changes, which on average affected about 4% of national refining capacity annually before 1997, increased to over 10% (of capacity) in 1997," he pointed out. This was "driven by a number of megadeals, such as the Marathon-Ashland mer-ger, the Shell/Texaco/Star (Enterprise) ventures, and a number of joint ventures between Pdvsa and U.S. refiners," he said.

Twenty-two U.S. refineries could change ownership in 1998, predicts Burke. But, while the need for gains in efficiency will continue, the size and pace of restructuring probably cannot be maintained at 1998 levels in subsequent years, Burke acknowledged.

Instead, companies will follow consolidation with a "focus on maximizing benefits from consolidations"-economies of scale, overhead cost cuts, efficiency gains-in order to maintain market share.

"Margins have been volatile," he said. "Right now, refiners are getting a zero return on their investment.

"This is a short-term problem, and why I believe consolidation will continue, creating only a few dominant players."

Survivors

Some refiners on the East, West and Gulf Coasts do not have the solid linkages to get their products to market, and are therefore forced to rely on middle men for sales. Coupled with today's competitive pricing structure, these are the plants that will be acquisition targets for refiners that are better integrated vertically, warns Burke.

He believes small niche refiners with logistical support to reach their particular market are more apt to survive.

One possible scenario for a successful alliance, says Burke, is a U.S. refiner tying up with a non-U.S. crude oil producer. A number of such joint ventures have been formed in recent years, most notably between U.S. refiners and the Venezuelan and Mexican national oil companies.

Refiners that can form these alliances through equity partnerships or mergers will continue, where others will be forced out of the industry, concludes Burke.