Is There More Downstream Consolidation To Come?

On April 30, Marathon Petroleum Corp. announced that it agreed to acquire rival Andeavor (formerly Tesoro Corp.) for $23.3 billion in what is the largest-ever deal for an oil refiner to date. The deal would create the largest independent refining company in the U.S. by capacity, surpassing Valero Energy Corp., with a fuel production throughput of more than 3 million barrels per day (MMbbl/d). 

The deal makes sense for the combined company as it gives Marathon increased access to supplying refined products to Mexico, where exports have surged in recent years due to the liberalization in 2013 of state-owned conglomerate Pemex’s decades-old monopoly. The combined company will also be better-positioned to produce fuel for the shipping industry when new low-sulfur emissions rules go into effect in 2020. 

In addition, increased oil production in onshore basins, such as the Permian in West Texas and New Mexico, combined with a growing appetite for U.S. oil overseas as evidenced by healthy exports, makes proximity to lower-cost crude and access to pipeline and export capacity a defining competitive advantage.   

The announcement, however, received pushback from some members in Congress. Senator Ed Markey (D-Mass.) sent a letter to Justice and Federal Trade Commission officials expressing his disapproval of the proposal. 

“I am concerned that the consolidation of two major refiners into a single entity that would control one-sixth of U.S. refining has the potential to limit competition and potentially expose American consumers to higher prices for gasoline and other domestically refined petroleum products,” the letter states

Who Could Be Next?
The agreement announced by Marathon Petroleum and Andeavor made some to wonder: Is there more downstream refining consolidation to come? 

Among some refiner names that have been floated as potential acquisition targets include CVR Refining, HollyFrontier and Delek US Holdings. Andeavor a few years ago made several overtures to acquire HollyFrontier, but the deal ultimately fell through. 

In early April, Goldman Sachs cited Delek as a potential takeover target, building a 15% probability of M&A into its $50 per-share valuation for the company. It could potentially be scooped up by PBF Energy or HollyFrontier. PBF had flirted in the past with acquiring HollyFrontier. 

Refining companies likely active in the hunt to scoop up assets include PBF, Phillips 66 and Motiva Enterprises LLC, which has the full backing of Saudi Aramco ahead of its highly-anticipated IPO scheduled for later this year or early 2019 (location of listed shares is still yet to be determined).  

Another refiner, Philadelphia Energy Solutions (PES), the largest on the U.S. East Coast, could eventually be on the lookout acquiring assets after it emerges from bankruptcy in mid-June, which should allow it to be acquisitive with a solidified balance sheet. 

In addition, international buyers are still very much interested in potentially snapping up U.S. oil refining assets. Likely interested suitors include commodity trading firms like Gunvor and/or Vitol and integrated oil and gas firms like PetroChina. 

What is certain, however, is that integrated oil companies like Chevron Corp., Royal Dutch Shell, BP plc and ExxonMobil Corp. will likely not be jumping in the foray of M&A activity as divesting non-strategic assets appear to remain a higher priority, especially as oil prices trend upward. 

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