U.S. oil refineries a tough sell in a recession

NEW YORK (Reuters) - U.S. oil companies may need to start pulling their unwanted refineries off the auction block if they want to avoid selling into the worst market for energy assets in more than six years.

The gloomy market is bad news for companies seeking to shrink their exposure to weak fuel demand in the recession-hit United States, but presents an opportunity for upstarts and national oil firms hoping to expand into a recovery.

"Clearly, the sellers are selling into what can only be called a distressed market," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Refinery prices have been hit by low demand for gasoline and diesel due to the ailing economy that has shrunk profit margins from their peaks a couple of years ago, making these plants an unattractive investment.

Demand for gasoline in the United States, the world's top consumer of oil, fell for the first time since 1991 last year and the government does not expect the nation's energy consumption to grow again until 2010.

The pool of potential buyers for the oil refineries has also been narrowed by the shrinking of credit availability.

"As a very cyclical industry, these business models do not generally support high leverage. At the trough of the cycle, it's very difficult to secure financing anyway," Mark Sadeghian an analyst at Fitch Ratings in Chicago.

The relatively low price Holly Corp HOC.N agreed to pay for Sunoco Inc's (SUN.N) 85,000-barrel per day Tulsa, Oklahoma plant earlier this month does not bode well for other refiners looking to sell off their assets, analysts said.

The Tulsa refinery deal will fetch about $745 per barrel of refining capacity, close to levels last seen in 2003 and about 80 percent less than the $3,920 per barrel of capacity that Alon USA Energy Inc (ALJ.N) paid for Valero Energy Corp's (VLO.N) Krotz Springs, Louisiana refinery last July.

Although the value of the Tulsa plant was reduced because it is in need of a $105 million upgrade to meet environmental regulations, the refinery still sold at a discount when compared to recent deals, analysts said.

Just two years ago, Tesoro Petroleum Corp (TSO.N) bought the Wilmington, California refinery from Shell (RDSa.L) for over $16,000 per barrel of capacity, according to Fitch Ratings.

For a list of refinery deals, please double click on

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Low refinery prices represent a marked change from earlier this decade when the refiners were the darlings of Wall Street and the country was facing a capacity crunch that pushed pump prices to then-record highs.

But despite the absence of buyers, most sellers are unlikely to continue to accept low prices, analysts said.

"It is extremely unlikely that any of the majors or minors, unless they are compelled to do so by some special situation, are going to want to sell into this bottom," said Joseph Arsenio managing director at Arsenio Capital Management in Larkspur, California.

Refineries currently for sale include Valero's 275,000 bpd Aruba refinery and Western Refining's 70,000 bpd Yorktown refinery. Valero had also hoped to sell its 195,000 bpd Memphis, Tennessee and 90,000 bpd Ardmore, Oklahoma refineries last year, but has since taken them off the block.

The dearth of refinery buyers is also due, in part, to a change in focus of larger refiners toward upgrading and expanding existing plants instead of buying new ones.

"The small guys want to get bigger, the big guys want to add to their fortress refineries, their large complex money-maker facilities," Sadeghian at Fitch Ratings said.

Valero, the largest independent refiner in the country, for instance, has invested billions in ongoing refinery expansions and upgrades, particularly at its Port Arthur, Texas and St. Charles, Louisiana refineries, although the company indicated that they may halt such projects due to the recession.

Ultimately, buying a refinery amounts to a vote of confidence in the U.S. economy and potential buyers may be wary of investing in refineries due to the uncertain future of fuel demand.

Another factor that may be dampening enthusiasm for the refining sector is the new administration in the White House.

At the beginning of his presidency, U.S. President Barack Obama set the goal of eliminating current levels of imports of oil from the Middle East and Venezuela in the next ten years.

"If suddenly people are driving cars powered by electricity or natural gas, where do refiners make money in that environment, especially with margins being as thin as they are?" Armstrong said.

(Reporting by Rebekah Kebede; Editing by Marguerita Choy)