SAN ANTONIO -- An independent refiner-marketer that until recently kept a fairly modest name in the retail business has more than doubled its retail presence with two key acquisitions taking place this past weekend.
As reported in a CSP Daily News Flash, Tesoro Corp., San Antonio, announced its purchase of Shell Oil Product's Los Angeles Wilmington refinery, its Wilmington products terminal and about 250 retail sites for $1.63 billion, plus the value of inventory at the time of closing. It also picked up 140 retail sites, brand rights and a terminal [image-nocss] from USA Petroleum Corp. for $277 million, plus the value of inventory.
These assets are a tremendous complement to our existing operations on the West Coast, said Bruce Smith, chairman, president and CEO, in a statement. The refinery fits perfectly with our system, and we expect to quickly integrate the facility into our network. With the unique focus we have as an independent refiner-marketer in the region, we expect to realize synergies immediately through crude purchasing and shipping logistics, as well as by optimizing the output of our refineries to maximize the production of clean fuel products for the California market.
In a fourth-quarter 2006 earnings Webcast (for a report on Tesoro's fourth-quarter results, see related story in this issue of CSP Daily News), Smith noted that the 100,000-barrels-per-day (bpd) Wilmington refinery acquisition increases the independent's overall refining capacity by 18%, boosts its ability to refine cheaper, heavier crude and enabling it to expand production of cleaner fuels, notably California's CARB gasoline blend.
Most of this fuel is slated for the about 390 retail locations picked up as part of the Shell and USA Petroleum acquisitions. Tesoro is acquiring about half of Shell's Southern California retail assets, according to Smith. The very high-volume siteseach averaging 225,000 gallons per monthwill retain the Shell brand for the long-term, and are valued at $400,000 to $3 million.
The purchase will be paid for by using cash on hand, which at yearend was approximately $1 billion and borrowings. The exact amount of both is yet to be determined, but the pro-forma debt-to-capitalization ratio is expected to be less than 50% at the time of closing. The company plans to quickly reduce debt through internally generated cash flow and has set a goal to reduce debt to 40% of capitalization by the end of 2007.
Tesoro also acquired 140 sites from USA Petroleum, with 132 in California73 in the northern part of the state and 59 in the southand the remainder in Washington and New Mexico. Many of the Northern California stores are former Beacon locations that Tesoro originally sold to USA Petroleum in 2002. Of the 140 retail sites, 125 use the USA brand and 15 use other major brands.
All of the former USA Petroleum properties are characterized as high-volume sites with an average volume of 185,000 gallons per month, and will be supplied by Tesoro's Golden Eagle and Wilmington refineries. The sites are also valued at $400,000 to $3 million.
Tesoro plans to retain the USA Petroleum brand at all of the locations, according to Smith.
USA has a very strong independent brand and it looks just like the Tesoro brand in Hawaii or Alaska, or the Mirastar brand, for that matter, he said during the earnings call. I think its presence is known; I don't think putting our brand in that market would be a recognized brand, and we'd be starting over.
Smith also said in a statement: USA Petroleum has been an independent marketer in California for many years. We are committed to maintaining the independent USA retail brand and growing our business with other independent customers. The acquisition provides us with locations near our California refineries that allow us to run the refineries at full capacity, invest in refinery improvements and deliver more clean products into the market. As an independent refiner and marketer, our strategy is to meet the product demand of a diverse customer base, including other independent retailers while also working to increase the amount of clean products available in the market.
Tesoro would own about 60% of the real estate for the Shell properties, according to Chuck Flagg, senior vice president, supply and optimization, and close to 100% of the dirt for the USA Petroleum sites.
With the Shell and USA Petroleum assets combined, Tesoro will command only about 4.2% of California's retail fuel market share. Although this seems like a small figure, company execs note that it offers wholesalers another branding option in a market that has been dominated by major oil.
When asked whether Tesoro has plans to further expand its retail network beyond these two acquisitions, Smith was noncommittal. Until we're in thereand we see how product flows and what we're doing, we're just going to pause, he said. We feel very comfortable with the amount of retail we've got; we think that it's small in the total market structure of California, but it'll be something meaningful in preserving the independence [of brand], which is very, very important in the state.
The current CARB gasoline production volume at the Wilmington refinery is about the same off-take as required by the Shell sites, according to Tesoro. Additional volumes from expansion of CARB production will be sold through the USA Petroleum sites and other independent marketers.
The USA Petroleum deal was made possible in November when Chevron USA Inc., San Ramon, Calif., abandoned its plans to purchase the Thousand Oaks, Calif.-based company. At the time, the companies did not offer a reason for the decision to end the deal, originally announced in mid-July; however, it was widely speculated that heightened scrutiny of the proposed buyout by the Federal Trade Commission (FTC) was the prime motivation.
In early November, Senator Barbara Boxer (D-Calif.) asked the FTC to thoroughly review Chevron's pending acquisition of the USA Petroleum stations. Boxer's concerns involved the fact that Chevron and six other large refiners supply about 90% of retail gasoline in the state, giving those companies a significant effect on retail gas prices in California by virtue of their dominant position in the market, according to her letter to FTC chairman Deborah Platt Majoras.
With the Shell and USA Petroleum acquisitions, Tesoro's network will encompass seven refineries with 663,000 barrels per day in capacity, around 860 retail sites and more than 6,000 employees.
Both transactions require regulatory approval, and the company expects them to be completed in second-quarter 2007.Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.