January 22, 2010 / 7:32 PM / 8 years ago

Oil baron O'Malley eyes Valero plant for U.S. return

NEW YORK (Reuters) - The last time refining maverick Tom O'Malley bought the oil refinery in Delaware City, Delaware, he doubled his money in two years.

Now he may be vying to do it again.

An investment group led by O'Malley is in talks with Valero Energy Corp (VLO.N), the top independent U.S. refiner, to buy the assets of the shuttered 210,000-barrel-per-day Delaware City refinery.

If the deal goes through, it would mark O'Malley's reentry into the U.S. refining sector as it faces its worst crisis in decades. PBF Investments would acquire a refinery that was losing $1 million a day in November, when Valero said it was closing the plant for good.

Delaware City could be the first refinery purchase for PBF Investments, a $2 billion investment vehicle formed in 2008 to buy U.S. refineries. Petroplus PPHN.VX, where O'Malley is currently chairman, started PBF along with private equity firms Blackstone Group (BX.N), and First Reserve Corp.

"Mr. O'Malley has a track record of buying refineries at low prices, running them for a few years, and then selling them," said Tim Evans, energy analyst for Citi Futures Perspective. "He certainly knows the refinery."

The sale could test O'Malley's vaunted reputation for turning around ailing assets, since it comes at a time when U.S. refiners are reeling from a third straight year of dismal margins, amid slumping fuel demand during a recession.

While O'Malley served as its chief executive, refiner Premcor Group bought the plant in 2004 from Shell Oil Co (RDSa.L) and Saudi Aramco for about $4,500 per barrel.

The company doubled its money when it sold the refinery to Valero in 2005 for an average price of about $10,000 per barrel, according to figures from Macquarie Research.

Terms of the latest potential sale were not disclosed and Valero said in a statement there was no timeline for negotiations.

Utilization rates at U.S. refineries fell to 78.4 percent last week, according to government figures. It was their lowest rate since the 1980s, excluding periods of curtailed activity due to hurricanes.

PBF officials were not immediately available to say if they plan to restart the Delaware City refinery or just use the site's crude and fuel storage terminals, which could be valuable assets on their own.

O'Malley, a New York City native, worked his way from the mailroom to the commodities trading floors at firms in the late 1960s. His working class upbringing made him a good fit for refining, a tough, industrial side of the oil business.

By 1990 he was leading Tosco, a refiner that grew into the leading U.S. independent refining company where he won a reputation for sage acquisitions.

"If anybody can take a refinery in the Northeast and make it work, (O'Malley) can," said Peter Beutel, president of Cameron Hanover energy consultancy in Connecticut.

Private equity groups Blackstone and First Reserve already have major energy holdings around the region. First Reserve is a major owner of crude oil and product storage in the Caribbean region, which could stage shipments to Delaware City, traders said.

Refiners were running near full capacity in mid-2007. But since then, U.S. oil demand has fallen by around 2 million barrels a day, heightening competition in the refining sector.

The Delaware plant, which can refine high volumes of heavy and sour crudes, represents 9 percent of Valero's total crude processing capacity of 2.8 million barrel a day.

Poor margins have prompted Valero to shutter its Aruba refinery and scale back rates at some of its 16 U.S. refineries, as well as reducing rates at its 480,000 bpd of coking facilities, which process largely heavy crude.

Valero has been looking for buyers for its Aruba and Paulsboro, New Jersey refineries. State oil company PetroChina (0857.HK) is said to be a potential buyer for the Aruba plant.

Valero shares fell 3.8 percent on the New York Stock Exchange in afternoon trade Friday.

Additional reporting by Robert Gibbons; Editing by David Gregorio

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