Watching the World Murphy breaks from U.K. R&M merger

WithDavid Knott from London
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Murco Petroleum Ltd., U.K. refining and marketing unit of Murphy Oil Corp., has pulled out of a planned merger of British R&M assets with Elf Oil U.K. Ltd. and Gulf Oil (Great Britain) Ltd.

When the merger was first disclosed, it was greeted as a positive move, because it would have entailed closure of a refinery in South Wales, where three refineries make the region one of the most crowded corners of Europe's refining industry.

The refinery closure will still go ahead: Gulf's 115,000 b/d capacity unit at Milford Haven will be closed down, while the Elf-operated 108,000 b/d unit nearby, in which Murco has a 30% interest, will stay open.

The original plan was to form a new company, with one refinery and a total of more than 1,500 gasoline stations, owned 41.25% each by Elf and Gulf, and 17.5% by Murco (OGJ, Nov. 11, 1996, p. 40).

Plans for the new company were well advanced, but in the end, the difference in size of Murco compared with its intended partners may have proved a stumbling block, although none of the three companies have said so publicly.

Little benefit

Mike Hulse, managing director of Murco, said the company aims to maintain its refinery interest and continue marketing through its 440 retail stations as before.

"We compared projections going forward under the merged company with what we would expect to do on our own," said Hulse, "and found that there was not enough difference to justify going ahead."

An Elf official said the withdrawal of Murco is not likely to affect the timing of first trading by the merged company, which is slated for midyear.

"What is significant to Elf," said the official, "is that the merger deal was originally put together by Elf and Gulf. Murco was a late entrant to the deal and has made a late exit."

David Setchell, managing director of Gulf Oil said: "The benefits and synergies originally identified remain unaffected by Murphy's decision. The priority for Elf and Gulf is now to accelerate merger plans."

Illogical

Martin Shepherdson, refining analyst at Wood Mackenzie Consultants Ltd., Edinburgh, said that on the face of its, Murco's withdrawal appears a little odd.

"We are not quite sure how Murco can operate more profitably on its own than as part of a larger group," said Shepherdson. "The move doesn't seem logical, unless Murco has something up its sleeve.

"It is difficult to fathom out Murco's reasoning. Whether it's to do with a disagreement over the valuation of assets or something else fundamental, we don't know."

One theory doing the rounds is that Elf and Gulf may have been concerned that the smaller Murco would have found trouble raising capital to meet some of the merged firm's rationalization plans.

Shepherdson said: "The cost of closing the Gulf refinery is likely to be quite large. Maybe Murco couldn't have found that much cash."

One thing for sure, Murco's withdrawal was not inspired by any improvement in the U.K. R&M market. "There is certainly no sudden resurgence in margins behind it," said Hulse.