Last November, I highlighted Alon USA Energy (NYSE: ALJ ) as a company worth watching in the refining and marketing sector of the oil patch. Its purchase of two West Coast refining companies -- the latest of its shrewd moves -- has made the continued observation worthwhile.
In January, Alon USA cleaned out its debt. In March, its shares were still cheap. As the company's coffers filled with cash, it bought Good Time Stores at the end of March to increase its retail footprint in the Southwest. And then, just last week, Alon USA more than doubled its refining capacity by purchasing Paramount Petroleum and Edgington Oil in deals totaling $459 million.
The double deal
The first part of that deal has Alon USA buying Paramount for $307 million plus $100 million in assumed debt. Alon USA will receive a 54,000-bpd (barrel per day) refinery in Paramount, Calif., and a 12,000-bpd refinery in Portland, Ore. The Portland refinery is primarily an asphalt plant, while the California refinery also produces California-grade gasoline and diesel fuel. Seven asphalt terminals and a 50% interest in Wright Asphalt Products, which sells modified rubber asphalt, are also included in the deal.
In the second part of the deal, Alon USA is buying Edgington Oil for $52 million to acquire a Long Beach, Calif., 24,000-bpd refinery that primarily makes jet fuel, asphalt, and fuel oil.
This double deal (link opens a pdf file) is a perfect fit for Alon USA. The company's refining capacity increases to 160,000 bpd, and it takes on additional scale and geographic diversification to feed its growing retail network. What's more, California refiners enjoy higher margins than do those in other parts of the country because of the state's specialty fuel formulations. Plus, the asphalt production capacity and terminals allow Alon USA to grow its asphalt business in the West Coast paving markets.
Alon USA intends to combine the Edgington Oil facility and Paramount's California location into a single refinery with a 78,000-bpd capacity, a move that could potentially boost gasoline and diesel production to 80% of refinery output, from its current level of 42%. Corporate savings from synergies are estimated at $10 million to $15 million per year over the long term. In the near term, management expects the deal to increase earnings per share by $0.60 and cash flow per share by $0.94.
Alon USA has acquired these assets for a very reasonable price -- $5,100 per barrel per day of refining capacity ($459 million/90,000 barrels). That's nearly 50% less than the price Valero Energy (NYSE: VLO ) paid to acquire Premcor last year.
The comparison goes only so far, however, since the Premcor facilities were much larger and more complex and produced higher percentages of higher-margin transportation fuels. Yet both companies paid much less than they would have if they had built new facilities.
One of the most intriguing aspects of the deal is Alon USA's intention to merge the two California refineries into a single operation. If management can execute on its plan to increase the merged refinery's gasoline and diesel production, the price Alon USA paid may well look like a steal in a few years.
This recent purchase confirms my belief that Alon USA has an exceptional management team. David Wiessman, chairman of the company's board, bought Alon Israel Oil in 1993 and built it into one of the leading fuel marketing companies in Israel. Take a look at the rest of the executive team, and it becomes clear that this small company is being run by industry veterans.
Obviously, Alon USA has a long way to go before it starts knocking heads with Valero, ConocoPhillips (NYSE: COP ) , or even Tesoro (NYSE: TSO ) . Yet 10 years ago, few people had heard of Valero or Tesoro. What kind of a company will Alon USA be in 10 years? I don't know, but I'm inclined to hold my shares and find out.
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