By Rye Druzin
San Antonio Express-News
Tesoro Corp. is buying El Paso-based Western Refining for $4.1 billion in a transaction that adds three new facilities to the San Antonio company’s portfolio and makes it the 5th-largest U.S. refiner able to process almost 1.1 million barrels a day.
The deal puts Tesoro closer to the more productive Permian Basin, the companies announced before the markets opened Thursday. Shares of Western Refining soared 22.8 percent on the news to $37.47 in midday trading.
The Alamo area will now account for roughly 17.2 percent of all oil refined in the U.S. between Tesoro’s expanded capabilities and the roughly 2.1 million barrels processed daily by San Antonio-based Valero Energy Corp., the nation’s largest refiner of petroleum products.
“This transaction will expand our strategic footprint which will now include advantaged crude oil producing areas in the Permian, San Juan and Williston Basins and the Rocky Mountain region,” said CEO Greg Goff said in conference call with analysts Thursday morning. The Permian, which spans roughly 300 miles by 250 miles from West Texas to eastern New Mexico, is the most prolific and resilient region in the U.S. for producing so-called tight oil.
Western’s El Paso, New Mexico and Minnesota refineries will bring Tesoro’s refinery count to 10 across the U.S. The new facilities will increase Tesoro’s capacity by about 30 percent, more than 254,000 barrels a day, allowing the company to leap frog over Chevron Corp. and Motiva Enterprises to become the No. 5 refiner in the U.S. The top four producers are Valero, Exxon Mobil Corp., Marathon Petroleum Corp. and Phillips 66 Co.
The combination of the companies is expected to produce between $350 million and $425 million in savings. At least $130 million of that is expected to come from the operational side of the new company, including improvements in purchasing and reducing costs in operating and turning around refineries during down times, Goff said.
Tesoro is offering Western’s shareholders 0.435 shares of Tesoro stock per Western unit, or $37.30 per share, a 22 percent premium over Wednesday’s closing price. The deal is valued at $6.4 billion after including Western’s $1.7 billion in debt a non-controlling interest in Western Refining Logistics, which manages pipeline, storage and transport infrastructure for Western. The logistics operation is valued at $605 million.
Goff said Western’s assets allows Tesoro to diversify its holdings across the United States, lessening the company’s exposure to the West Coast market by 20 percent.
“The combined scale with the addition of Western’s assets will improve our domestic crude oil supply opportunities and should increase working capital opportunities for both crude oil and refining products,” Goff said.
Tesoro also controls Tesoro Logistics L.P., a master limited partnership that operates many of the pipelines and storage facilities that feed into Tesoro Corp.’s refineries. When asked by a Goldman Sachs analyst whether Tesoro and Western Refining’s logistics’ operations would be combined, Goff replied that “we will look at the two MLPs over time and determine what’s the best things to do to operate the MLPs. It’s just premature to do that at this time.”