Marathon Petroleum will buy BP's 475,000 b/d Texas City, Texas, refinery for about $2.5 billion, the companies said Monday.
The deal includes $598 million at closing, $1.2 billion in product inventories and a $700 million six-year earn-out arrangement based on future margins and refinery throughput, the companies said.
The sale also includes three natural gas liquids pipelines originating at the refinery; an allocation of BP's Colonial Pipeline shipper history representing 50,000 b/d; four terminals; marketing contract assignments for about 1,200 BP retail locations, representing about 64,000 b/d of gasoline sales in the US Southeast; and a 1,040 MW cogeneration plant.
"Today's announcement is the second major milestone in the strategic refocusing of our US fuels business," Iain Conn, CEO of BP's global refining and marketing business, said in a statement. "Together with the sale of our Carson, California, refinery, announced in August, the divestment of Texas City will allow us to focus BP's US fuels investments on our three northern refineries, which are crude feedstock advantaged, and their associated marketing businesses.
"Marathon Petroleum is a highly respected refiner and marketer," Conn said. "Their ability to take on the responsibilities of this large and complex refinery will be good for the long-term future of the business and its employees. Although largely a merchant refinery, we have decided to also sell certain terminals and marketing assets in the Southeast US."
Marathon Petroleum President and CEO Gary Heminger said: "[The] world-scale refinery and related assets complement our current geographic footprint and align well with our strategic initiative of growing in existing and contiguous markets to enhance our portfolio."
Heminger said the acquisition "will provide MPC the opportunity to capture synergies across our existing Gulf Coast operations, optimize commercial and process improvements, expand our retail presence in the Southeast and enhance our ability to sell products into export markets."
Marathon shares leaped as much as 9% after the early-morning announcement Monday, but simmered down to close the day at $57.92, up $3.05, or more than 5.5%.
Given the relatively low $600 million purchase price for the assets, analysts saluted the transaction.
"My rule of thumb is, you pay as much for the hardware as you [do for] the inventory," Oppenheimer analyst Fadel Gheit said. In this case, Marathon paid half as much for the assets than it did for the inventory, he said.
Marathon already has an 80,000 b/d refinery in Texas City next to BP's much larger facility. Although the independent refiner expects synergies between the two facilities, they will be run separately, company spokeswoman Angelia Graves said.
The BP refinery, which suffered a large fire and explosion in 2005 that killed 15 workers and injured 170 others, is one of the largest and most complex in the US with a Nelson complexity rating of 15.3, Heminger said.
A complexity rating measures the secondary conversion capacity of a facility relative to its primary distillation capacity. The rating reflects a refinery's cost and also its potential to turn out higher-value products.
Addressing the refinery's safety record during a conference call to explain the transaction, Heminger said BP has made a "significant amount of investment to bring the plant up to speed from a processing side, through the turnaround side and recommissioning."
Richard Bedell, Marathon's senior vice president of refining, said BP's Texas City refinery "is a very different place than it was in 2005," and said it has undergone a significant refurbishment and reconfiguration and BP has worked to instill a safety culture into the refinery.
The potential $700 million earn-out in the purchase price includes sums that Marathon may pay to BP if the buyer earns certain defined margin thresholds of $1.65 billion to $1.775 billion per year over six years. The payout ranges from to $200 million to $250 million per year.
Analysts, which said the transaction came after weeks of media speculation -- Valero Energy was also rumored as potential buyer -- gave a thumbs-up to the acquisition.
"We consider this acquisition a solid positive for Marathon," Roger Read, senior analyst for investment bank Wells Fargo, said in a Monday note issued prior to the conference call.
Read noted that the refinery increases Marathon's Gulf Coast exposure and raises its total refining throughput capacity by about 40% to 1.7 million b/d. It also improves access to price-advantaged crudes and export markets, he said.
BP, which did not participate in Marathon's conference call, announced plans to divest the Texas City refinery in February 2011, along with the 266,000 b/d Carson plant which Tesoro agreed to buy in August for $2.5 billion.
