Holly, which operates just two refineries -- one in New Mexico, and one in Utah -- certainly has a long way to go before reaching Valero-like volumes. In fact, the more concentrated structure of the market today probably precludes a second act. Still, by purchasing an asset with an ostensible $1.6 billion replacement value for only $65 million, Holly is certainly on the right track. The Tulsa refinery, coastally disadvantaged but close to Cushing and a Magellan Midstream Partners
At $745 per daily barrel of refining capacity, this is a cheap purchase, but it's not quite as cheap as a straight comparison to deals such as Valero's mid-2008 sale of its Krotz Springs refinery to Alon USA Energy
Holly, on the other hand, estimates a capital commitment of only $150 million. To gauge how good a deal this is for Holly, it really comes down to the cost of this project. Taking the firm's $1.6 billion estimate of the Tulsa refinery's replacement cost, Holly is either getting the asset for $0.13 or $0.28 on the dollar, after adding in the cost of the diesel desulfurizer, depending on whether we use Holly's or Sunoco's project cost estimate.
Both sound like deep discounts, but the latter would actually be much closer to historical norms. Given the company's stated ability to efficiently replicate the desulfurization work performed at its other two refineries, however, Holly may be getting a sweet deal indeed.
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Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. Magellan Midstream is an Income Investor pick. The Motley Fool has a disclosure policy.