Oil refiner Tesoro Corp. (IW 500/42) agreed to buy Western Refining Inc. for about $4.1 billion, creating a company that will account for about 6% of U.S. crude-processing capacity.
Tesoro will acquire Western Refining at an implied price of $37.30 a share, a 22% premium to Wednesday’s closing price, the companies said in a joint statement Thursday. The transaction is expected to close in the first half of 2017, subject to regulatory and shareholder approvals.
The takeover comes as U.S. independent refiners brace for lower margins after two years of strong profits. The benchmark U.S. refining margin has fallen to about $11.81 a barrel from a peak of more than $30 in early 2015, while government-mandated biofuel credits will cost more than $2 billion this year and more in 2017. Billionaire investor Carl Icahn, who controls CVR Refining LP, has warned of a 2008-style financial crisis in the sector.
“We’re at the bottom of the refining cycle so valuations are low,” Gurpal Dosanjh, an analyst for Bloomberg Intelligence, said by phone Thursday. “This is the best time to be buying companies.”
The combined companies will deliver $350 million to $425 million of annual cost savings within two years. They will have a refining system with over 1.1 million barrels a day of capacity, according to the statement.
The deal “extends our portfolio into attractive and growing markets,” Greg Goff, chairman and chief executive officer of Tesoro, said in the statement. “Our increased scale and diversity will enable us to leverage and enhance in-house technical capabilities, which we expect will result in cost efficiencies, the ability to drive more growth and increased productivity.”
The deal value is $6.4 billion including about $1.7 billion of Western debt and the $605 million market value of a non-controlling interest in Western Refining Logistics LP, according to the statement. The partnership owns pipelines in the prolific Permian Basin of West Texas and New Mexico.
The combination will transform Tesoro into the fifth-largest U.S. refiner behind Valero Energy Corp., Exxon Mobil Corp., Marathon Petroleum Corp. and Phillips 66 and ahead of Motiva Enterprises LLC and Chevron Corp., according to data from the U.S. Energy Information Administration.
The announcement was made before the start of regular trading in New York. Western Refining rose 1.1% to $30.84 at 6:01 a.m. in New York after rising 1.8% yesterday. Tesoro fell 0.86% to $85 after closing at $85.74 Wednesday.
By James Herron and Javier Blas