"Given that the El Dorado refinery has the ability to supply light products to portions [image-nocss] of our convenience store network in Tennessee and Arkansas, we will, for the first time in our history, own and operate a refinery capable of supplying our retail stores in neighboring markets," said Uzi Yemin, president and CEO of Brentwood, Tenn.-based Delek US Holdings.
Along with the refinery, Lion Oil owns and operates the 80-mile Magnolia-El Dorado crude oil transportation system that runs between Shreveport, La., and the Magnolia crude terminal (west of the El Dorado refinery); the 28-mile El Dorado crude oil transportation system that runs from the Magnolia terminal to the El Dorado refinery, as well as two associated product pipelines; a crude oil gathering system with more than 800 miles of pipeline; and three light product distribution terminals located in Memphis and Nashville, Tenn. and El Dorado.
The El Dorado refinery is currently able to produce low-sulfur gasoline and ultra-low-sulfur diesel products, in compliance with existing clean fuels requirements. The refinery completed a turnaround in late 2009, with the next turnaround currently scheduled for 2014.
"This transaction represents a significant expansion of our downstream asset base throughout the Gulf Coast and Mid-Continent regions. Upon becoming the new majority owner and operator of Lion Oil, we will be well-positioned to participate at each level of an integrated supply chain that includes the production, wholesale distribution and retail marketing of refined products in the region," Yemin said. "This transaction will also significantly expand our wholesale distribution network in multiple new markets throughout the Mid-Continent region. From El Dorado, we will have the ability to market products to owned and third-party terminals with access to a major product pipeline system which runs from the Gulf Coast into the Midwestern United States."
He added, "Our management of an integrated supply chain will help to mitigate supply risks while optimizing distribution synergies across our downstream asset base, thereby positioning us to expand our competitive reach. From a strategic perspective, we believe this transaction will further our goal of being a vertically integrated company and will diversify our exposure beyond a single refining asset. The addition of the El Dorado refinery will more than double our total production capacity. The El Dorado refinery's location affords it access to a variety of local, domestic offshore and foreign crudes. Over time, we believe we will be able to source and process an increased quantity of cost advantaged crudes at El Dorado, representing a clear economic opportunity for us."
In 2007, Delek US acquired a 34.6% minority interest in Lion Oil from multiple selling shareholders. At the close of the current proposed transaction, Delek US will own an additional 53.7% equity interest in Lion Oil, bringing Delek US' total equity ownership in Lion Oil to 88.3%. Upon becoming the new majority shareholder, Delek US will assume operational control and management of the Lion Oil refinery and the related assets. Lion Oil will be treated as a consolidated subsidiary of Delek US.
Delek US has agreed to acquire Ergon's equity interest in Lion Oil for a combination of cash, stock and the payment or replacement of all debt currently owed by Lion to Ergon. Delek US will issue restricted shares of common stock to Ergon valued at approximately $45 million; Lion Oil and/or Delek US will make a cash payment of $50 million to Ergon; Lion Oil will execute a new $50 million term note payable to Ergon that will be guaranteed by Delek US; and Lion Oil will divest certain assets to Ergon. And Delek US has agreed to assist Lion Oil in obtaining third-party financing of working capital previously provided by Ergon.
"With the continued support of our Israeli relationship banks and our majority shareholder, Delek Group, we are in the process of securing long-term financing for this transaction. Moreover, as a result of our ongoing financing efforts and increasing free cash flow from current operations, we anticipate Delek US will have improved liquidity at the close of this transaction, when compared to year-end 2010," said Yemin.
The transaction is expected to close during the second quarter of 2011, subject to the completion of financing arrangements and the satisfaction of customary closing conditions.
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Delek US is a diversified energy business focused on petroleum refining, marketing and supply of refined products, and retail marketing of fuel and general merchandise. Its refining segment operates a refinery with a design crude distillation capacity of 60,000 bpd in Tyler, Texas. Its marketing and supply segment markets refined products through its terminals in Abilene, Texas, and San Angelo, Texas, as well as other third-party terminals. Its retail segment markets gasoline, diesel and other refined petroleum products and convenience merchandise through a network of company-operated retail fuel and convenience stores, under the MAPCO Express, MAPCO Mart, East Coast, Discount Food Mart, Fast Food & Fuel and Favorite Markets names.
Separately, San Antonio, Texas-based Tesoro Corp. has announced that it plans to expand the crude oil throughput capacity at its Mandan, N.D., refinery from 58,000 bpd to 68,000 bpd by the second quarter of 2012, subject to permitting requirements. The company said it expects to supply the refinery with additional crude oil from the crude oil production in the nearby Bakken Shale/Williston Basin area via the Tesoro High Plains Pipeline system.
"Coupled with the 2010 acquisition of the Shell-branded wholesale supply contracts which provide fuel for approximately 300 stations in the region, this expansion reflects Tesoro's commitment to grow our refining and marketing business in the Northern Great Plains," said Tesoro president and CEO Greg Goff. "This allows for further integration opportunities in our operations and capitalizes on the steadily increasing domestic crude supply from the Bakken area."
Tesoro agreed last August to acquire the existing Shell-branded wholesale supply contracts in North Dakota, South Dakota, Minnesota, Utah and most of Idaho. Tesoro now operates approximately 650 Shell-branded stations within its retail system.
Under the terms of the agreement, Tesoro may also grow the Shell brand through retail stations in these areas that are anchored by the company's refineries in Mandan, N.D., and Salt Lake City. (Click here for previous CSP Daily News coverage.)
The current expected capital investment for the expansion will be approximately $35 million, the company added.
Tesoro is an independent refiner and marketer of petroleum products. Through its subsidiaries, it operates seven refineries in the western United States with a combined capacity of approximately 665,000 barrels per day. As of December 31, 2010, its retail segment included a network of 880 branded retail stations under the Tesoro, Shell, USA Gasoline and Mirastar brands.
And as reported last week, First Israel Mezzanine Investors Fund (FIMI) has invested $36 million in options and shares of Alon USA Energy Inc. The investment, like other mezzanine investments by FIMI, is in two parts, said the report. FIMI has invested $18 million in Alon USA operating subsidiary Alon Brands Inc., which handles the company's retail operations, as part of a debt offering. The bonds will bear 7% annual interest, well below the interest rate at which Alon USA previously issued bonds to investors.
FIMI was also given $18 million in options, exercisable for shares in either Alon USA or Alon Brands, at FIMI's discretion, the report added. Both the bonds and options are for five years. (Click here for previous coverage.)
Dallas-based Alon USA owns refineries in Texas, Louisiana and California. Alon Brands is the largest 7-Eleven licensee in the United States and operates more than 300 convenience stores in Texas and New Mexico. Alon Brands markets motor fuel products under the FINA brand at these locations and at approximately 640 distributor-serviced locations.
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