As Hess (HES +0.00%) continues its transition into a pure-play exploration and production company, the next item on its agenda is to unload its terminal network. The company has set a July 2 deadline for interested parties to submit bids; Hess is hoping to get about a billion dollars for these assets. While there are likely many interested parties, the assets would seem to be a great strategic fit for an MLP. Let's take a closer look at the assets and the companies that just might make an offer.
The assets
The 19-terminal network along the East Coast includes about 28 million barrels of storage capacity. In addition to this, Hess owns interests in two terminals in the Caribbean that adds another 24 million barrels of storage capacity. Each day Hess moves about 700,000 barrels of crude oil and refined products through this system. It's one of the largest terminal networks on the East Coast and its terminals are located in most major port markets:
Source: Hess
These assets generate about a $100 million in annual EBITDA which puts the asking price at around 10 times that number. That would appear to be a fairly steep price, but these are stable assets located in key coastal marketplaces. Moreover, for the right purchaser, these assets could really be a great strategic fit.
The potential bidders
There are a lot of names being thrown around as potential purchasers of these assets, including Marathon Petroleum (MPC 5.48%), Sunoco Logistics (NYSE: SXL), and Buckeye Partners (BPL +0.00%). Both Sunoco and Buckeye are MLPs, which is where I personally think these assets are best suited. Let's take a closer look at each company to see which one makes the most strategic sense.
Marathon does have a very large terminal and transportation business that includes 65 owned light product terminals in the Midwest and Southeast, as is shown on the system map below. Adding Hess' terminals would enable the company to expand its footprint to the east and position to expand its Speedway brand. However, the company does have a lot on its plate this year with several significant capital projects in the works. Unless the price is right, Hess' terminals don't make a whole lot of sense here.
Source: Marathon Petroleum Investor Presentation
Sunoco already has an extensive refined product terminal network of more than 40 terminals. Its assets are located in the mid-Atlantic, Midwest, and Southwest regions. That would make the addition of Hess' terminals a nice strategic move because there is both overlap as well as geographic extension. The only problem is that a billion dollars might be a bit much for a company that's only acquired $1.4 billion in assets over its 11-year history, especially when you consider that it has its hands full already with a budget of $700 million for organic growth. I'd be very surprised to see Sunoco emerge as the winning bidder.
Source: Sunoco Logistics Investor Presentation
The one name that would not surprise me, because it would make a lot of sense, is Buckeye. The company has been actively expanding its domestic and international terminal business (see system map below) over the past few years and Hess' assets would add greater geographic diversity to the company. The key here though, in my opinion, could be the inclusion of Hess' terminal in St. Lucia as well as its HOVENSA joint-venture terminal in St. Croix. Those assets would help Buckeye add to its international terminal business, which already includes assets in both the Bahamas and Puerto Rico. A final item to note, Buckeye currently trades at an enterprise value to EBITDA ratio of about 16.5 times, which means that acquiring Hess' terminals at around 10 times EBITDA would lead to accretion in its distributable cash flow.
Source: Buckeye Partners Investor Presentation
Final Foolish thoughts
If I were a betting man, I'd pick Buckeye as the most logical destination for Hess' terminal network. That being said, the odds are that someone else will swoop in and snap up these assets, and a number of private equity firms are candidates. The key takeaway for investors, though, isn't to speculate on takeovers but rather to have a better understanding of what your company owns and why those assets matter. Always remember, we're not buying ticker symbols but part ownership interests in real businesses with real assets.
