April 2, 2012 / 11:35 PM / 5 years ago

Exclusive: Pennsylvania fracking firm in lead for Philly refinery: sources

Employee Josh Watkins changes gas prices on a sign at a Sunoco station in Alexandria, Virginia April 12, 2011.Molly Riley

NEW YORK (Reuters) - Preferred Sands LLC, a unit of a privately owned Pennsylvania-based investment firm, is seen as a possible frontrunner to buy Sunoco Inc's (SUN.N) Philadelphia refinery, two sources familiar with the bidding process said on Monday.

As discussions intensify with a handful of varied firms that are said to be considering a bid for the 335,000 barrel per day (bpd) plant, Preferred is working with a group of local pension funds as well as more traditional financiers to put together a deal.

"We made a very substantial bid on the refinery," confirmed Mike O'Neill, founder and chief executive officer of Preferred Unlimited, the parent company when contacted by Reuters.

"We will continue to run it as a refinery and use our substantial logistics experience and leverage our oil industry logistic knowledge."

The oldest continuously operating plant in the United States, Sunoco's Philadelphia refinery is the largest of three East Coast plants shuttered or put on the sales block as the rising cost of importing crudes squeezed margins. It is still operating but Sunoco has said it will idle the plant on July 1 if it is not sold.

The sale has become politically charged on a local and national level, both over potential job losses and a possible squeeze on regional fuel supplies this summer.

Preferred Sands, based in nearby Radnor, is a supplier of sand and proppant to the hydraulic fracturing industry, and also operates a fleet of more than 1,500 rail cars with connections to major railroads.

BAKKEN CONNECTION

O'Neill said the rail connection would be able to help the refinery run a lot more of the cheaper domestic North American crude including Bakken from North Dakota, which would improve profit margins. The refinery would also continue to run more traditional imported, higher-cost crudes priced off the international benchmark Brent oil futures.

Lack of infrastructure in some of the new unconventional U.S. oil plays like Bakken has led to substantial amounts of crude being moved by rail and truck.

Earlier this year, Sunoco said it had already tested small amounts of Bakken crude at its Philadelphia refinery which had been railed to Albany, New York, and moved by barge down to Philadelphia.

Other bidders for the refinery include United Refining, a small privately held refining company in the northwest corner of the state.

It was launched in 2007, but is part of a group called Preferred Unlimited, run by longtime Pennsylvanian Michael O'Neill, with a 20-year history of investments.

"We are all from Philly ," said O'Neill, referring to his management team.

O'Neill said that Barclays Bank is providing some financing and the Philadelphia Building Trades -- a group of local unions including boilermakers, electricians, and others -- is also involved in the deal.

On its website, Preferred says it "leverages a ‘family-owned' philosophy to acquire businesses that share a common theme: market scarcity that other investors have overlooked with the opportunity to add value through a creative, community-minded vision."

Oil Price Information Service (OPIS) reported that PBF Energy, which bought two nearby refineries in Paulsboro, New Jersey, and Delaware City, Delaware, from Valero Energy Corp, was also in the running. But the sources told Reuters that the firm, run by legendary investor Tom O'Malley, was not bidding.

Mike Karlovich, a spokesman for PBF Energy, declined to comment.

Two other refineries for sale are already idled: ConocoPhillips' 185,000 bpd refinery in Trainer; and Sunoco's 178,000 bpd refinery in nearby Marcus Hook, which is seemingly destined to be a terminal for oil products.

The East Coast refineries pay a premium over U.S. prices to run imported light, sweet crude. Combined with slowing demand for gasoline, these refiners have seen their profit margins pinched substantially and some have opted for closure.

A study by the U.S. Department of Energy said that if the Philadelphia refinery closes it will cut the region's refinery capacity in half leaving the Northeast vulnerable to supply disruptions and price spikes.

OPIS said on Monday that the deadline for the sale was dismissed by people involved in the bidding process.

"Various deadlines have come and gone. They tend to extend them," said one source.

A Sunoco spokesman declined to comment on the bid deadline and any other aspect of the bid process, citing confidentiality.

Reporting By Janet McGurty; Editing by Bob Burgdorfer

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