Sunday, January 22, 2012

OIL REFINERIES....OPPORTUNITY

Global economic turmoil has resulted huge jump in merger and acquisitions. Huge debt, cash strapped operations, no consumer market products, and decline in government support (incentives, subsidies etc) has increased the asset sales across the globe. The objective of this article is to dig out the scope of cheap properties of oil exploration across the globe.

It has been found that after 2008 debacle their is a significant rise in Quality Bad Assets. Now the term itself will sound new but it means that before 2008 the assets were of best quality but financial crunch has converted them into Bad Assets despite of their Best Quality. Among the several industries oil exploration industry is one of them which turned out to be a mouthwatering opportunity for investments.

Sunoco Inc an oil refinery which produces oils around 175,000-barrel-per-day and another refinery at Philadelphia which produces 330,000-barrel-per-day has been shut down due to weak and unacceptable financial performance over the last few quarters. ConocoPhillips another refinery which remained idled with a capacity of production of 185,000-barrel-per-day was also shut down. The prime reason for shut down being of various pressures from product imports, a decline in demand and the cost of regulatory requirements.

In this week we find another refinery plant Hovensa LLC is planning to shut down its refinery and convert it into an oil storage terminal. Weak demand and competition from foreign refinery has compelled to take these actions.

Why Shut Down?
By now you must have understood why these assets are going for an sale tag. But the main reason is global competition which has turned out be a very competitive. Many refineries in the US and Europe are up for sale or are in financial distress. Despite of all efforts refineries in these countries are losing around more than $800 million in the past three years and significant losses continue to mount in coming years. NASDAQ and the Wall Street Journal reported that refining operations at Bakersfield were suspended for at least a month for economic reasons.

Taking a toll in other parts of the economy we find South Africa was recently hit by sporadic fuel shortages caused by the unplanned shut down of fuel refineries. Apart from financial problems the refineries are getting shut due to environmental issues. Moreover shift in the quality of crude oil that refiners have to process. On average, crude oil production is becoming heavier and sourer (containing more sulphur). Heavy, sour crudes are more difficult to process and yield more heavy products, which need additional processing and reducing the competition with other countries. Earlier the share of light products and middle distillates in global oil consumption has risen from 65% in the early 1980s to 80% today. An uncertainty over ROCE in refinery business has eradicated the growth prospects and sustainability of the refinery plants. For the top five gas companies operating in the United States, their profit margin was 6.65% between 2006 and 2010.Abiding the environmental issues has resulted an outflow of $116 billion in their facilities since 1990. Issue like of obtaining the raw product and refining turns out be one of the biggest hurdles. Raw material which is sensitive to international political climates has kept huge pressure on the operating margins.

Recent Deals
This industry remains silent despite of its eye popping M&A. 1322 oil and gas transactions were announced in 2011, an increase of more than 5% when compared to 2010. The aggregate value of oil and gas transactions in the year totaled US$317b. It has found that the numbers of deals are getting increased with a drop in value per M&A. In 2010, there were 76 oil and gas transactions valued in excess of US$1b; in 2011 this figure had declined to 71.Among the several markets the North America, accounting for 562 deals or 43%, remained the most active market in refinery business M&A.
Opportunity
I find a significant opportunity for emerging economies to invest in these oil refineries and turn them into a gold mine. Moreover the demand of ethanol and inclusion of ethanol into the gasoline stream has taken a sizable chunk out of the petroleum market. In a recent note it has been found that Saudi Arabia is doing extensive investments to build refineries in China and Indonesia of around $200 billion Philippine oil refiner to invest in ExxonMobil’s downstream business in Malaysia. Hence Emerging economies PE can find a significant opportunity to do invetsment5s in this industry.

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