Plan for $2.5B sale to Marathon Petroleum takes BP out of shadow

The planned sale of BP’s Texas City refinery to Marathon Petroleum Corp. reinforces Marathon’s entrance as a major player in the U.S. refining sector, helps BP focus its strategy and distances the British oil company from the shadow of a disaster at the plant seven years ago.

The $2.5 billion deal for one of the nation’s largest and most complex refineries, announced Monday, will make Marathon the fourth-largest domestic refiner.

“This is a unique opportunity to acquire world-scale refining assets at an attractive price,” said Marathon Petroleum CEO Gary Hemminger during a conference call with analysts Monday morning. “These refining and related assets strategically complement our existing business and provide the immediate scale for us to expand our Marathon brand business even further in the Southeast.”

Marathon Petroleum, based in Findlay, Ohio, spun off last year from Houston-based Marathon Oil, now an independent oil and gas company.

The price of the deal announced Monday includes $598 million for the refinery, related pipelines and some retail contracts, and $1.2 billion for the plant’s inventory of oil, gas and refined fuels. The price tag for the refinery was lower than expected, given BP’s investment of about $1 billion in plant upgrades over the last seven years, but analysts said it made sense for both companies. The refinery can process more than 450,000 barrels of oil per day.

“Marathon got themselves a deal,” said Fadel Gheit, an analyst with Oppenheimer & Co. “The Texas City refinery was refurbished after the fatal accident and much of the equipment is pretty new. They are getting a refinery that needs relatively little maintenance.”

Canada, North Dakota

For BP, the Texas City deal and the sale earlier this year of its Carson, Calif., refinery are in step with its plans to focus on refineries with the best access to crude from Canadian oil sands and the Bakken shale in North Dakota, which have more favorable prices and better access to retail markets.

Pavel Molchanov, an analyst with Raymond James, said the price per barrel of processing capacity was somewhat below market.

“From BP’s standpoint, the multiple was not especially high but strategically it made sense,” Molchanov said. “In refining, location vis-a-vis discounted crudes is a big deal. The Carson refinery and the Texas City refineries are not in the best position to access discounted crude, because they are coastal locations.”

The Texas City refinery now gets most of its crude from the Gulf of Mexico or international sources.

Hemminger said in the conference call that Marathon Petroleum hopes it eventually can get access to the lower-priced Canadian and Bakken crudes through several pipeline projects anticipated in the next five years.

Besides the $598 million price for facilities and $1.2 billion for inventory, BP potentially can bank up to $700 million over the next six years, depending upon refining margins and other performance measures at the Texas City plant.

The refining margin is the difference between the price a refinery pays for crude and what it gets for refined products.

Under the agreement, Marathon Petroleum and BP will split margins that exceed a specified threshold, said Jeff Dietert, an analyst with Simmons and Co. “This is a way for both parties to share in the upside, in the event that margins continue to be robust,” he said.

2010 oil spill

The deal also brings BP within striking distance of its stated goal of selling $38 billion of assets by the end of 2013. With the refinery, BP has sold $35 billion of assets since 2010, giving it a substantial bankroll as it works to negotiate settlements with private parties and government entities arising from the 2010 oil spill from its Macondo well in the deep-water Gulf of Mexico.

The sale also turns a painful page for the refinery, where an explosion in 2005 killed 15 workers.

BP has resolved most of the civil litigation and government citations that resulted from that accident, and has said it will be responsible for any fines related to the 29 remaining citations, which it is still negotiating with the Department of Labor. Marathon will assume responsibility for any needed corrective action related to the unresolved safety citations, the companies said.

About 1,000 people work at the refinery, and union representatives have said that under the successive ownership clause in union contracts, new ownership will not change employment terms.

“We’re glad it’s Marathon,” said Joe Wilson, a union representative at the Texas City refinery. “We have been up for sale for a year and a half. That’s a long time for uncertainty to be there. We have had some ups and downs with Marathon, but they haven’t been hard to negotiate with.”

Marathon shares closed up $3.05 at $57.92 Monday on the New York Stock Exchange. BP rose 11 cents to $42.26.