Cash strapped Petroplus may put buys on hold

ZURICH (Reuters) - Petroplus PPHN.VX, Europe's largest independent oil refiner, may have to shelve an acquisition drive and save money in the face of tough trading conditions -- and could even find itself a takeover target.

The Swiss-based group settled debt and raised around $285 million to help fund more buys, saying it would move fast if the right opportunity came along. But a weak third quarter and gloomy outlook means it may have to use the cash to fund its operations.

"Nobody really believes Petroplus can make an acquisition in the near term," said ZKB analyst Martin Schreiber.

While the company has expressed interest in picking off "low hanging fruit" in North America and in Europe -- Royal Dutch Shell (RDSa.L) assets in Montreal, Canada, and Heide and Harburg in Germany are on the block, for example -- it has bought nothing this year and even sold an Antwerp bitumen plant.

This inaction on the M&A front stands in stark contrast to Petroplus' aggressive expansion between 2006, when Chairman Thomas O'Malley joined the company, and early 2008, in which time the company bought no fewer than five refineries.

Previously O'Malley had built up independent refiners Tosco and Premcor in the United States before selling out to Phillips Petroleum (COP.N) and Valero Energy (VLO.N), respectively.

He followed the same path with Petroplus, buying refineries like France's Petit Couronne and Reichstett from Shell in 2008 for around $785 million as oil majors slashed exposure to the traditionally low-margin downstream business.

A deal with private equity firms Blackstone (BX.N) and First Reserve in early 2008 was expected to lead to more acquisitions, but the French refineries were its last buys.

TIGHT MARGINS

Petroplus, with a market cap of $1.7 billion, is Europe's only major independent refiner with an international presence, and has six refineries in Belgium, France, Germany, Switzerland and the UK.

However, its refineries are not as complex as many rivals and produce less of the pricier gasoline and diesel fuels, which makes them less able to compete when refining margins collapse.

Northwest Europe refining margins fell to $2.60 per barrel in the third quarter, from $7.13 in the same period of 2008, data from oil major BP showed.

This partially underscored Standard & Poor's decision to downgrade Petroplus' debt after its underwhelming third-quarter results, citing the tough market and weak operating performance. Moody's put it on watch.

These structural problems mean Petroplus shares, which lost three quarters of their value in 2008 on the back of poor profitability and recession, have barely benefited from a wider sector recovery, rising just 9 percent this year while the European oil and gas sector is up nearly a quarter.

To add to its problems, the company also plans sizeable maintenance work and has lowered the outlook for its refinery run rates, which will limit free cash flow.

While Petroplus issued senior notes and convertible bonds, raised cash in a rights issue and secured a three-year revolving credit facility in an effort to shore up its finances, analysts say it is not enough to fund an acquisition drive.

"You need financial flexibility to make buys, and Petroplus hasn't got it," said one fund manager who holds Petroplus shares, but who asked that neither he nor his company be named.

"The cash from their rights issue has been consumed by rising oil prices and anemic demand for heating oil and diesel."

Crude oil traded at around $70 per barrel on the launch of the rights issue on September 9, but has since rallied more than 10 percent to some $78/bbl.

HUNTER BECOMES PREY?

Some believe Petroplus could itself become a takeover target, given the relative weakness of its share price, which trades at a discount to sector peers Hellenic Petroleum (HEPr.AT) of Greece and Finland's Neste Oil (NES1V.HE).

Vontobel analyst Andreas Escher calculates Petroplus' value at $6.3 billion for its installed capacity and inventory, though any suitor would have to take into account estimated net debt of $1.4 billion.

That leaves a theoretical Petroplus share price valuation of about 55 Swiss francs - sharply above its current price of around 20 francs.

"Given the 100 percent free float and the incentive of the management to cash in following a takeover bid, we continue to see Petroplus as an attractive takeover bride," Escher said.

Possible buyers could include Russian oil producers such as Russia's LUKOIL (LKOH.MM) or TNK-BP TNBPI.RTS, which are keen to secure facilities in Western Europe to process their crude, or Asian state-backed oil companies looking to establish themselves as global players in the oil products market.

However, "it is more likely that a strategic investor from one of the Russian oil companies steps in to buy them out," said the fund manager who holds Petroplus shares.

($1=1.017 Swiss Franc)

(Editing by Simon Jessop)