Tesoro Corp held talks to buy smaller rival oil refiner HollyFrontier Corp earlier this year in a bid to join the top echelons of the competitive U.S. refining industry, according to people familiar with the matter.
Both companies were in discussions in the first quarter of 2015, but the negotiations were scuttled after HollyFrontier’s board of directors balked at Tesoro’s terms, including the proposed price, the sources said this week.
The sources did not disclose Tesoro’s offer price for HollyFrontier, which has a market capitalization of around $9 billion. Tesoro is still interested in a deal and the talks may be rekindled, the people said.
The sources asked not to be identified because the negotiations were confidential. San Antonio-based Tesoro said it constantly reviews its portfolio to ensure it has the right asset mix to deliver shareholder value and growth, and declined to comment on speculation. Dallas-based HollyFrontier did not immediately comment.
A combined company would be the fourth-largest independent U.S. refiner, with a network of oil processing plants stretching across the Midwest and West Coast, from Oklahoma to California and Alaska.
HollyFrontier’s shares rallied over 7 percent on the news and were on track for their biggest one-day gain in 3-1/2 years.
HollyFrontier shares were last up 3.5 percent at $47.68 after rising as high as $49.54. Tesoro shares fell 2.7 percent at $95.21.
If successful, buying HollyFrontier would end a four-year effort by Tesoro Chief Executive Officer Gregory Goff to expand the company’s footprint eastward. He has also approached privately held refiner Sinclair, one source said.
HollyFrontier would offer Tesoro access to the lucrative Rocky Mountain region, where refiners close to domestic crude production have seen margins rise as they have access to crude that can be difficult to transport to traditional refining centers on the Gulf Coast.
Goff has already grown Tesoro from a sleepy West Coast-focused refiner into a prominent independent refiner with plants in North Dakota, California, Washington, Alaska, and Utah. He also jettisoned an underperforming Hawaii plant, spun off Tesoro’s pipeline and logistics assets into a $4.2 billion master-limited partnership, and formed a joint-venture rail yard in Vancouver to bring North American crude to make its refineries more competitive.
Since the talks with HollyFrontier ended, Tesoro has had a cash windfall as its California-based refineries benefited from elevated gasoline prices due to outages at its competitors, which may help it lift its offer. Tesoro plans to release second-quarter earnings on Aug. 6, and Holly on Aug. 5.
Valued at $8.95 billion, HollyFrontier has refineries in Oklahoma, Kansas, Utah, New Mexico, and Wyoming, giving it access to the storage hub at Cushing, Oklahoma, and the Southwest, where the markets are closely related to the West Coast that Tesoro already serves.
While the companies generally operate in adjacent territory, they do each operate plants in Salt Lake City. The companies might be forced to divest one of their two plants there as part of a transaction, one of the people said.
FLURRY OF DEALMAKING
While much smaller than Shell’s $70 billion takeover of BG, set for completion in early 2016, the deal would be the first major tie-up between two independent refiners since the $7 billion merger of Holly Corp and Frontier Oil Corp in 2011. Recently, integrated companies like Marathon Oil Corp and ConocoPhillips have spun off refining to favor exploration and production.
It could touch off a flurry of dealmaking in the United States. Last week, Reuters reported that French oil major Total S.A. wants to sell a 50 percent stake in its sole U.S. refinery.
The deal would also illustrate how refining has remained a bright spot during the year-long crude oil price rout that has battered shale and offshore producers, service providers and traders.
Unlike the 2008 price crash, when refiners got pinched by low gasoline demand, drivers have been taking to the road in record numbers to take advantage of lower prices, bolstering the companies that turn cheap crude into valuable products like gasoline and diesel.
Refiners have also benefited from a decades-old ban on U.S. crude exports, which prohibits the export of oil, but allows refiners to export diesel, gasoline and other fuels. As the U.S. shale boom has pumped a level of crude not seen since the 1970s, refiners have churned out record volumes of products for export.
(Reporting by Jessica Resnick-Ault and Mike Stone in New York; Editing by Meredith Mazzilli and Jeffrey Benkoe)
This article was from Reuters and was legally licensed through the NewsCred publisher network.