Financial woes fuel busy year for refining deals

Last year was a tough one for refining, as companies shrunk in size or bailed on the financially challenged industry all together, according to an IHS Herold report released Wednesday.

The value of deals involving refining assets surged to $6 billion in 2011, a 50 percent increase over 2010, the report found. Transactions in the retail/marketing subsector, which includes fueling stations, tripled during that time. Meanwhile, petrochemical deals rose from $10 billion to about $13 billion in 2011.

The busy year was fueled by a few large moves by major oil companies that exited the refining business. Philadelphia-based Sunoco announced last fall that it would shed its refineries.  Marathon Oil completed the spinoff of its refining arm in June and ConocoPhillips announced last year that it would similarly divest from its refineries.

“Faced with the prospect of low margins, decreasing fuel demand in the U.S., overcapacity, aging, inflexible facilities and increasing environmental regulation, integrated oil companies have had to reevaluate their downstream business strategies,” said Cynthia Pross, IHS senior analyst for M&A research, in a written statement. “For some, the refining business no longer makes economic sense. For others, it is an opportunity to acquire assets at favorable prices.”

Energy Transfer Equity Partners’ sale of its propane distribution arm contributed to a nine-fold increase the value of transactions in that subsector, according to the report.

The high value of refining transactions was aided by the the merger of Holly Corp. and Frontier Oil, which was announced in February.

The IHS Herold 2011 Global Downstream M&A Review tracks mergers and acquisitions in refining, petrochemical, terminals and other downstream assets worldwide.

In 2011, refiners struggled against rising prices for crude oil, which they buy to refine into gasoline, diesel and other fuels. Three East Coast refineries, responsible for about half of the region’s refining capacity, have shut down or are slated to close in part because high crude prices have made them uneconomical.

“We expect refiners to continue to face challenges through 2012 and beyond,” Pross said.