A Refined Industry Outlook
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sunoco (NYSE: SUN) recently announced that they were entering a joint venture with the Carlyle Group which will be called Philadelphia Energy Solutions. The venture was established to run the 330,000 barrels of oil per day Philadelphia refinery that Sunoco had been looking to either idle or sell. This deal marks the second east coast refinery deal this year and continues on an interesting trend in the refining industry.
When Phillips 66 (NYSE: PSX) sold their Trainer refinery to Delta (NYSE: DAL) it marked a huge shift in the industry from one of vertical integration within the energy industry to newly refined vision on how to better utilize these assets. In the Phillips/Delta deal the airline is looking to cut their costs by controlling energy input which they view as a way to save 10% of their annual fuel costs. The deal saved hundreds of jobs and could be a defining moment in helping to save the airline industry from its continuing the trend of destroying shareholder value.
The latest deal involving Sunoco is another shift for the industry. The east coast refining industry has been under heavy pressure from rising input cost of more expensive imported oil. Their gulf coast counterparts are enjoying much better margins thanks to the growth of the domestic energy industry. Sunoco itself has been suffering from weak returns for the past few years and recently announced they were selling the company to Energy Transfer Partners (NYSE: ETP). As part of the deal they planned to either permanently idle or partner/sell their refinery assets.
In the transaction with Carlyle not only does it save 850 jobs but both companies are going to invest to grow the venture creating up to 200 new permanent jobs. They see two catalysts which make this investment worth the capital. First, they are planning to build a high-speed train unloading facility in order to provide access to crude oil from the Bakken region in North Dakota. Also, according to the press release Carlyle said, “The joint venture is also exploring other significant capital projects, including the creation of new businesses based on the availability and abundant levels of natural gas from the Marcellus Shale.” Both possible investments would take advantage of the growing production of energy here in the US which would turn this formally disadvantaged imported oil refinery into a more advantaged domestically fed refinery.
I’ve previously written about Ethane being a stranded commodity in the Marcellus and Utica production basins. A lot of focus has been on taking the product to the gulf coast markets or in building a local market. This transaction marks one of the first in an effort to take the product to the east coast export market. One of the keys behind Energy Transfer’s desire to acquire Sunoco was because of their ownership interest in Sunoco Logistics (NYSE: SXL). They are working to build a pipeline called Project Mariner with a partner and the east bound segment is designed to take product toward an east coast refining market to then either used in the population centers of the mid-Atlantic or be exported.
We are beginning to turn a corner in our domestic energy infrastructure and will continue to see new deals which will transform us from an import based energy consumer to an export based producer. Where we once were worried about losing key pieces of our energy infrastructure and the jobs they provided we are seeing a refined and renewed outlook where investments are being made with a look toward the future and jobs are being added instead of lost. These are exciting days for investors and for America and we’ve only just begun on this long journey forward toward at least less energy dependence, if not complete independence.
latimerburned owns shares of Phillips 66. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.