ARCO Analysis

Company's longtime California presence waning with asset sales

LA PALMA, Calif. -- Known for selling low-priced gasoline and for its 24-hour ampm convenience stores, ARCO has been a dominant player in California's petroleum industry for decades. It is California's largest gasoline distributor, with more than 20% of the market. But since last year's Gulf of Mexico oil spill, parent BP PLC has either sold off or put up for sale most of its California assets, said a report by The Sacramento Bee.

The assets include: The BP refinery in Carson, which is one of the two largest in California with about 1,200 employees. The plant, [image-nocss] whose sale is expected to be completed next year, processes 265,000 barrels of oil per day, or enough to supply 25% of the gasoline used in the Los Angeles area. ARCO's gas stations in the lucrative Southern California market, which used to be the firm's home base. A 50% interest in Hydrogen Energy California, which is building a $2 billion, ultraclean power plant in Kern County. Last month, a Massachusetts company acquired BP's and mining conglomerate Rio Tinto's interests in the yet-to-be-built plant, which has been awarded more than $300 million in federal funding. In March, BP sold its oil terminals at the ports of Sacramento and Stockton to Houston-based Buckeye Partners LP as part of a $165 million deal that included all of BP's U.S. terminals and pipelines.

After the deals are completed next year, ARCO and BP's remaining California assets will include stations in Northern California and its ampm convenience stores.

"There's been so much economic pain for them from the gulf disaster that they have been shedding assets and are looking to shed even more assets," Gordon Schremp, senior fuels specialist with the California Energy Commission, told the newspaper.

The divestitures are notable because ARCO used to be one of California's largest companies, and its history is ingrained in the economic history of the state, said the report. The company traces its California roots to 1905 and the founding of Richfield Petroleum in Los Angeles. With the post-World War II boom, Richfield emerged as a leading gasoline producer in California. It later merged with an East Coast company, Atlantic Petroleum. The new company was called Atlantic Richfield Co., or ARCO. BP acquired it in 2000.

"It hurts my pride to see a company I so adored disappear," George Babikian, who served as president of ARCO's refining and marketing operations before retiring in 1993, told the Sac Bee. "It was a great company."

In conference calls with investment analysts earlier this year cited by the newspaper, company executives said the Carson refinery and the Southern California gas stations would require significant investments to remain competitive.

Joseph Tovey, a New York-based oil industry analyst and consultant, told the paper that profit for the oil-refining and gasoline-sales business has been around 6% of investment. But on the exploration and drilling side of the business--where BP makes most of its money--the rate of return has been in the 20% range, he said. Therefore, it makes sense for BP to focus on the more profitable side of the business.

"This is a strategic decision and has nothing to do with the California economy or the regulatory issues," Iain Conn, BP's chief executive for refining and marketing, said in a February conference call, according to the report.

BP's divestitures are not expected to result in higher gasoline prices in California, experts said.

Jeremy Bulow, a Stanford University business professor, told the paper that buyers for the refinery and the stations will mostly likely have to come from out of state. Any company already doing significant business here would likely run into antitrust and other regulatory challenges, he said. Under such a sale, many of the long-term supply contracts between the refinery and local gas station operators likely would remain.

Instead of raising wholesale prices, a new investor would try to run the refinery more efficiently than BP or ARCO, said Bulow.

London-based BP, with U.S. headquarters in the Chicago area, markets more than 15 billion gallons of gasoline every year to U.S. consumers through more than 10,000 BP and ARCO retail outlets and supplies more than four billion gallons of fuel annually to fleets, industrial users, auto and truck manufacturers, railroads and utilities. BP is the single, global brand formed by the combination of the former British Petroleum, Amoco, Atlantic Richfield (ARCO) and Burmah Castrol. ARCO-branded ampm stores are currently found in California, Nevada, Oregon, Washington and Arizona; BP-branded ampm stores are located in Chicago, Orlando, Cleveland, Cincinnati and Atlanta.