Analysis: US refiners buy parts, not plants

OREANDA-NEWS. US refiners will boost product yields and light crude throughputs with small investments while strong margins suppress the desire for major acquisitions.

Wariness about long-term domestic demand limits US independent refining interest in adding significant crude or products capacity. Mid-size US independent refiners have instead sought regional diversity and access to export markets through acquisitions of specific assets.

Independent refiners still craving midstream and downstream consolidation said asset sales remained generally off the table. Companies would instead spend on share buybacks and smaller efficiency upgrades, executives said during calls to discuss first quarter earnings.

"The tilting at windmill strategy of hoping for large, accretive acquisitions is just not a high enough probability for us to spend a lot of time on," HollyFrontier chief executive Mike Jennings said.

HollyFrontier came up empty-handed after charging into PdV's potential sale of its US refining subsidiary, Citgo, last fall. Acquiring all of Citgo's 757,000 b/d of refining assets would have more than doubled HollyFrontier's 443,000 b/d of capacity and spread the company into the eastern US midcontinent and the US Gulf coast export market.

PBF Energy, the 540,000 b/d independent refiner trapped in the US Atlantic and midcontinent, said its long-running quest to spread to the US Gulf or west coast would also wait. Refiners were simply too profitable in the first quarter, especially in California, where PBF has hoped to take advantage of refiners tired of typically thin margins and a complex regulatory regime.

Unplanned downtime at Tesoro's 168,000 b/d Golden Eagle refinery in Martinez, California, and an explosion and unit shutdown at ExxonMobil's 250,000 b/d refinery in Torrance, California, sent margins surging higher in that market this year. Margins for the Los Angeles market averaged 40pc in the first quarter compared to year-ago levels, according to an Argus 3-2-1 crack spread for the market. Margins for the second quarter so far are higher by more than a third.

The rare surge profitability on the west coast slowed selling interest and boosted the asking price of assets.

"We have the appetite, but the people in the restaurant right now are not providing the right dishes to us," executive chairman Tom O'Malley said.

West coast refiners remain largely isolated from North American crudes facing stiff pricing pressure. But the cheaper crude prices have helped to deliver strong profits in the US midcontinent and US Gulf coast.

Refiners with growing midstream portfolios expected that pressure to shake pipelines, terminals and other associated assets loose for sale. But the sector has proven more resilient than downstream buyers expected.

"We might say we're a little surprised by that, as we think that through," Phillips 66 president Tim Taylor said. "But we just don't see any compelling cases out there today."

Refiners instead continue to transfer assets from refining to logistics corporate entities in intra-company sales. And companies will invest accumulated cash into small, quick-return modifications at refineries or return the money through stock buybacks.

HollyFrontier will do both. The refiner plans a series of projects increasing refinery yields at its Wyoming, Kansas, Oklahoma and New Mexico refineries. And the refiner plans \$1bn in share repurchases, a nearly \$600mn extension of an existing share repurchase program.

"We've had a chance to look internally and externally at what might be available, and we've come to the conclusion that the assets we own, we think, are the best opportunity for investment," chief financial officer Doug Aron said.

At least one major downstream acquisition appeared on track. Delek US expected to close this week on its purchase of a 48pc share in Alon USA. Both companies operate less than 200,000 b/d of active refining as well as integrated wholesale and retail networks. Delek has in the past taken smaller interests in assets before purchasing full control, and described Alon as a motivated seller.

"We believe that two refineries are not sufficient enough to be in our business," chief executive Uzi Yemin said.