Authors: John Auers, Ryan M. Couture and Mike Leger
The recent death of Yogi Berra at age 90 on September 22 not only marked the passing of a baseball legend, but also one of the most memorable and lovable personalities in sport history. Yogi was known as much or more for his “Yogi-isms” as he was for his 3 MVP’s and 10 World Series titles. As I read about his funeral (held on September 29), which was attended by a who’s who of the baseball world, I thought about how well the strategy behind one of those Yogi isms worked, despite the flawed logic – “Always go to other people’s funerals, otherwise they won’t come to yours.” Another Yogi-ism, perhaps his most famous one, came to mind the very next day when the announcement came of the sale of ExxonMobil’s Torrance, CA refinery to PBF Energy. That action comes hot on the heels of PBF’s June definitive agreement to acquire ExxonMobil’s Chalmette, LA refinery. Once completed, these transactions will bring PBF’s total refining capacity across its five facilities to nearly 900 MBPD, giving them national scope and moving them into the top ranks of the U.S. refining industry (6th in total capacity). This rapid ascension (PBF was only formed in 2008) is eerily similar to a period over two decades ago. That’s when PBF’s founder, Tom O’Malley, a New Yorker as legendary in the refining industry as Yogi is in baseball, really began the transformation of the business from one dominated by integrated majors to independent operators; or as Yogi would say, “It’s déjà vu all over again.”
“You can observe a lot by just watching.”
Tom O’Malley has certainly been down this road before. Long involved in the energy business, Mr. O’Malley began his pioneering moves into refinery ownership in the late 1980’s. Starting with the single 166 MBPD Avon Refinery in Martinez, CA, O’Malley transformed Tosco into one of the country’s largest independent refiners in the U.S. at the time. O’Malley began his career as a mailroom employee and rapidly advanced with Salomon Brothers and Phibro where he became involved with and ultimately led their oil trading groups. He eventually founded Argus Investment where he began making trades on his own. He worked a deal to purchase 26% of Tosco stock in the late 1980s and led the company through an aggressive expansion decade. His business model was geared around capitalizing on opportunities to pick up refineries that big oil was looking to shed, as they refocused on “core assets.” Beginning with Exxon’s Bayway refinery in 1992, Tosco acquired seven refineries with total crude processing capacity in excess of one million BPD by 2001.
Figure 1 chronicles O’Malley’s build-up of Tosco. Following the Exxon Bayway acquisition came BP refineries at Ferndale, Washington, Marcus Hook, Pennsylvania, Unocal’s San Francisco and L.A. refineries and Equilon’s Wood River, Illinois refinery.
Evaluating these purchases, one thing was clear, O’Malley was a bargain hunter. Looking only for distressed assets, the purchase prices on his first six refinery acquisitions averaged approximately 10% of replacement cost, or as I believe he was once quoted, “for 10 cents on the dollar.” He then purchased BP’s Belle Chase, LA refinery in 2001 at slightly over one-third of the cost to build it at that time. Taking each facility and turning it around, Tosco became not only viable, but profitable. Under O’Malley’s leadership, Tosco successfully turned a group of undervalued refineries into a successful refining conglomerate, complete with an extensive retail network of gas stations and convenience stores. Tosco emerged as the modern independent refiner, and O’Malley as a trend-setter and pioneer in the industry.
“When you arrive at a fork in the road, take it.”
With over 1.3 MMBPD of refining capacity, and an increasingly profitable outlook, it was time to sell. Tosco first sold the Avon refinery in 2000 to Ultramar Diamond Shamrock for $725 MM, which we estimated was ~30% of replacement cost at the time. The next year, Tosco sold the remainder of its assets to Phillips Petroleum for $7.36 billion, which we estimate was between 25-30% of replacement. At the time, Tosco was the nation’s largest independent refiner.
“I just want to thank everyone who made this day necessary.”
But the sale of Tosco certainly did not mean that O’Malley was done with refining. In fact, by 2002, O’Malley was back in, becoming chairman and CEO of Premcor (previously Clark Refining & Marketing). In short order, he led the company through two refinery acquisitions in Memphis, TN (2003), and Delaware City, DL (2004), before selling one to ConocoPhillips (Hartford, IL, 2003) and the remaining four (Delaware City, Lima, Memphis and Port Arthur, 2004) to Valero.
“It’s so crowded no one goes there anymore.”
O’Malley took a brief hiatus from the U.S. refining industry after the sale of Premcor, leaving the field to others such as Valero, Tesoro, Frontier, Western, Holly and others, who generally followed his game plan of assembling independent refining systems. But it wasn’t too long before he got back in the fray, forming PBF Energy, together with partners Blackstone and First Reserve, and taking the helm as Executive Chairman. Beginning in 2010, PBF began buying refineries from Valero and Sunoco, including the Delaware City, DE refinery that was sold to Valero during his time at Premcor and was subsequently shut down in late-2009. In addition, PBF bought the Paulsboro, NJ refinery from Valero and Toledo, OH refinery from Sunoco, all at fractions of replacement costs.
This year, two more pending acquisitions were announced. PBF in June announced the deal to purchase the Chalmette Refinery from ExxonMobil and PDVSA. And last week, the planned purchase of ExxonMobil’s Torrance refinery was announced. This will bring the PBF system up to five refineries. The timeline below lays out the order of events.
Looking at these transactions in more detail, it really does seem to be a bit of déjà vu. Once again, O’Malley is buying refinery assets for approximately 10 cents on the dollar.
“If you ask me anything I don’t know, I’m not going to answer.”
The key to trading is timing. And O’Malley seems to have a keen sense of timing refinery trades. Figure 3 contains a bar chart showing transactions that took place during each year over the past three decades. The bar for each year reflects the percent of replacement cost paid in all refinery transactions from 1987-2015, weight averaged by year. The Tosco acquisitions took place in 1992, 1993, 1995, 1997 and 2000 (blue). Tosco assets were sold in 2000 and 2001 to Equilon (Shell/Texaco) and Phillips, respectively. Under O’Malley’s leadership, PBF is following a similar trend, with three refinery purchases in 2010 and two in 2015 (in green).
“Even Napoleon had his Watergate.”
As the famous proverb says, nothing ventured, nothing gained. While O’Malley has had tremendous success in the U.S., not everything he has touched turned to gold. After his tenure with Premcor, O’Malley joined Petroplus and proceeded to acquire eight refineries throughout Europe over several years, before the company lost their credit line in December 2011. This ultimately led to bankruptcy filings in January 2012 after defaulting on their bonds. Today, half of those refineries remain closed, with two still operating under Gunvor and two under Vitol.
“The future ain’t what it used to be.”
So what does the future hold regarding refinery sales and valuations, and can clues be had from comparing O’Malley’s past transactions with his latest moves? Yogi had it right to a large extent, comparing refinery transactions from decades ago may not be very consistent with what is taking place today. In recent years, the logistical assets associated with specific facility or company downstream operations have become the target of MLPs bringing high multiples of revenues tied to throughput and limited exposure to refining margins and other commercial risks. This leaves much less for allocation to the refinery hardware component in the overall transaction. In several recent transactions, analysts have estimated the refinery hardware was acquired for little or nothing. It should also be noted that refinery transactions in any given year or at a particular time, although an indicator of the general environment for refining is not necessarily representative of the values of the majority of refining assets in the markets served by those that traded. In many instances, transactions occur involving marginal facilities or as a result of special circumstances which can significantly skew the valuations. As a result, every refinery transaction and/or valuation is very unique and complex and requires significant analysis to truly understand how it compares with past transactions and what it means for future valuations.
Turner, Mason & Company is continually monitoring global refining markets and analyzing developments which drive the industry. We have been involved in assisting both buyers and sellers of refining assets in various roles. We also develop reports and studies which analyze and forecast industry trends. In our most recent study, we teamed with Schlumberger Business Consulting to develop a comprehensive assessment and forecast of what can be expected in global markets and what those trends will mean for production levels, demand, prices, differentials and other key parameters. We are pleased to announce the release of this publication, The Evolving New World Order: Rebalancing Oil Supply in the Next Decade. For more information about this publication or other consulting services TM&C can provide, please visit our website or give us a call.