Oil Refining: Buy or Sell?

Murphy Oil (NYSE: MUR  ) completed the divestiture of its North American refining operations this month when Valero Energy (NYSE: VLO  ) agreed to buy its last U.S. refinery, complete with inventory, for $625 million. The sale comes as a sigh of relief for Murphy, which had been trying to sell off its refining assets since last summer. As it turns out, the recent movement of oil and gas companies shedding their refining business is a win-win situation for everyone.

Refiners buy in
This purchase is the most recent in a line of strategic moves for Valero. The company sold two refineries in the Northeast because of slim margins caused by imported oil. The Murphy purchase increases Valero's presence on the Gulf Coast and, perhaps more importantly, enables it to increase capacity without the tremendous expense of an equipment upgrade.

Valero isn't the only refiner to walk away with a great find from the Murphy Oil tag sale; Calumet Specialty Products (Nasdaq: CLMT  ) is a winner as well. The refiner bought Murphy's operations in Superior, Wis., which immediately increased its capacity by 50% to 135,000 barrels a day. The company plans to issue $200 million in private placement debt to cover costs and a portion of the purchase price for the acquisition.

E&Ps sell out
Murphy joins Marathon Oil (NYSE: MRO  ) as two of the first major oil and gas companies to completely sell off their refining business in the U.S. ConocoPhillips (NYSE: COP  ) and Sunoco (NYSE: SUN  ) are also in the race to leave the refining game.

Sunoco acknowledged that its refining business was so bad that even if it cannot sell its refineries, they will go idle by next July. Similar to Murphy Oil, Sunoco's East Coast refineries suffered tremendously under competition from domestic oil, and what proved to be an insurmountable distance from current oil hotbed Oklahoma, where local refining competitors like HollyFrontier (NYSE: HFC  ) have been able to clean up. Figuratively, of course.

Foolish takeaway
All this wheeling and dealing presents a few options for investors. First, it is an opportunity to reconsider and pursue oil and gas plays that are becoming more efficient -- and hopefully more lucrative -- as they shed refining operations. Second, refineries with growing market share may warrant a second look as well, especially those that can convert cheap crudes in light of the current decline in U.S. demand for gasoline.

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Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter @TMFDuffy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 13, 2011, at 8:53 PM, TadpolesUS wrote:

    Ms Duffy - you might wish to edit your article in regard to the refining capacity of Murphy's Wisconsin refinery.

    As a retired Murphy Oil employee, I can tell you that the Superior plant has capacity of about 40-45,000 BPD, and Calumet has not made significant increases in refining capacity. (Any such expansion would take years to put into place.)

  • Report this Comment On December 10, 2011, at 5:48 PM, Themadclicker wrote:

    I do not understanding why the oil companies are divesting themselves of refining and distribution of their petroleum products. At the gas pumps, will we no longer see major oil company names that we are use to? Will their station's names change to Valero? or If they do not change their names, then the oil companies will have to purchase their product from Valero? It would seem to me they could make more money if the oil they sold was their own and not someone else's.

    Concerning the Superior refinery, will they be refining the oil from the fracked wells from North Dakota and the tar sands of Canada?

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