Giant Industries Inc.: Earnings Take Giant Step Backward

March 28, 2007
Arizona-based petroleum refiner posts poor fourth quarter results, but a merger and strong roots could pull company through the weeds.

The bigger they are the harder they fall. Just ask Giant Industries Inc., Scottsdale, Ariz., a refiner and marketer of petroleum products that owns and operates one Virginia and two New Mexico crude oil refineries.

Indeed, the company -- one of IndustryWeek's 50 Best Manufacturing Companies for 2006 -- reported full-year 2006 net earnings of $82.8 million versus net earnings of $103.9 million in 2005. For the fourth quarter of 2006, net earnings were $1.8 million compared with net earnings of $26.6 million for the fourth quarter of 2005. For those keeping track, that's more than a 93% drop in earnings.

"While 2006 net earnings were by far the second best year in our company's history, results were hampered by operating problems in our refining operations," said Fred Holliger, Giant's CEO, in a Feb. 27 statement. "Our fourth-quarter 2006 earnings were negatively impacted by outages at our Ciniza refinery and our Yorktown refinery that significantly impacted our operating results."

According to company press releases, the Ciniza refinery, located near Gallup, N.M., has a crude oil throughput capacity of 20,800 barrels per day (bpd). A fire occurred on Dec. 27, 2006, in a heater used in connection within one of the two units that manufactures ultra low sulfur diesel. Another fire occurred Oct. 6, 2006, after a pump failed in its alkylation unit.

The Yorktown refinery, located in Yorktown, Va., experienced a fire on Oct. 1, 2006. The Yorktown refinery has a crude oil throughput capacity of 62,000 bpd.

While these setbacks may have brought others to their knees, Giant has a history of fighting back.

The company was founded in 1961 with $1,500 of borrowed cash and a leased Richfield service station in Glendale, Ariz. The company built its first full-service station in Pinetop, Ariz., in 1966 and by 1969 Giant had built the first completely automated self-service gasoline station from the ground up in Phoenix. A few years later the Arab oil embargo of 1973 resulted in the cutoff of Giant's main fuel supply. Vowing a course of self-sufficiency, the company assumed an aggressive posture and built a refinery in Farmington, N.M.

It's probably that fighting power that made Giant attractive to others.

Giant Industries Inc.
At A Glance

Giant Industries Inc.
Scottsdale, Ariz.
Primary Industry: Petroleum and coal products
Number of Employees: 2,632
2005 In Review
Revenue: $3.6 billion
Profit Margin: 2.90%
Sales Turnover: 3.64
Inventory Turnover: 28.43
Revenue Growth: 42.67%
Return On Assets: 14.79%
Return On Equity: 47.99%

In August 2006 Western Refining Co. announced its plan to acquire Giant. After completing the transaction, Western will be the fourth largest publicly traded independent refiner and marketer in the United States with a total crude oil throughput capacity of approximately 216,000 bpd. In addition to Western's 117,000 bpd refinery in El Paso, Texas, Western will gain an East Coast presence with Giant's refinery in Yorktown and will gain two refineries in the Four Corners region of Northern New Mexico with a current combined capacity of 37,000 bpd.

"We are pleased to announce that we have received the affirmative vote of more than a majority of our outstanding shares approving our merger with Western Refining Co.," said Holliger in the Feb. 27 statement. "We believe the merger is an outstanding opportunity for our shareholders and are heartened by the overwhelming positive vote. In addition, we continue to believe that the merger will enhance opportunities for our employees as a result of being a part of a larger organization. We also believe that our customers and suppliers will be well served and benefit from the combined companies' greater economies of scale and the resources needed for sustained success in our industry. Now that we received the approval of our shareholders, the only remaining hurdle to completing the merger is the Federal Trade Commission merger review process."

The merger is expected to close April 13, 2007.

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