Wednesday, February 27, 2008

Petroplus and Blackstone to acquire refineries

They've committed $2 billion in cash to purchase oil refineries in the US. More than a week ago, private equity firm Klesch signed a $8 billion deal to build a 300,000 barrel a day refinery in Libya and an aluminum smelter. Where would someone buy an oil refinery on the cheap?

The cheapest refineries in the world are selling on Wall Street. To add capacity to an existing refiner, it costs about $10,000 for each bpd production. To build a refinery? Well, back in the states a new one hasn't been one built in thirty years-so it's at least double that and that's only after you get the permits. So using the above metrics, Western Refining (WNR 23.76), (which reports earnings tomorrow and 225,000 bpd production) should be selling above 50. And when crack spreads had widened, WNR was selling at 66.

You can make the same arguments for Tesoro (TSO 41.58), but it would be too big as a play on Petroplus and Blackstone. The folks that jig stocks will play with WNR. When HOC reported earnings, the stock jumped 6 points. Thus WNR is the trade today as it is both an earnings and an asset play.

As my daughter would say, "It's the best of both worlds!"


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