Private Equity Shows Interest in U.S. Refineries

PBF Investments has agreed to pay $220 million for a Delaware City refinery shuttered by Valero Energy (VLO) last year as a result of the recession.

The facility had been losing roughly $1 million per day, resulting in a charge of $1.7 billion to $1.8 billion. Unfortunately, Valero had to lay off 550 employees. Other operators, including Sunoco (SUN) and Western Refining (WNR), have also closed refineries in the past year.

Even as the global economy comes back, it is not easy to be upbeat about the refinery business. Demand for gasoline is still lackluster, yet the cost of oil remains high, which pinches margins. The consensus is that the situation will last for a while. No doubt, this is the belief of companies like Valero.

At the same time, there is excess refinery capacity on the market, which is another drag. What's more, alternative energy like biofuels will likely put pressure on gasoline demand.

But not everyone has a sour view on the industry. In fact, one of the top players, Thomas O'Malley, who runs PBF Investments, sees opportunity.

A Contrarian's Perspective

So why buy a refinery? O'Malley is a true contrarian and believes that things are not as bad as they look -- especially as there will likely be more refinery shut-downs over the next year. Besides, he is getting a nice deal on the Delaware property, which produces 182,200 barrels a day. For example, Delaware is providing help with financing and tax benefits. There were also concession on environmental liabilities.

When it comes to the refinery business, O'Malley has a sterling track record. A former oil trader at Salomon Brothers, he used his expertise to eventually operate companies. In 1990, he took the helm of Tosco and solid it for $7 billion in 2001 to ConocoPhillips (COP). Then, in 2002 he came on board Premcor and sold the business for $6.9 billion to Valero.

His next play was Petroplus, which focused on consolidating the refinery market in Europe. However, it has actually been a challenge because of the slow economy. Last year, the company sustained a $250 million loss.

But O'Malley is bullish, and in 2008 he formed PBF, the investment arm of Petroplus, with $2 billion in backing from the Blackstone Group (BX) and First Reserve. Keep in mind that Blackstone made a bundle on the Premcor deal.

True, O'Malley's strategy is risky. But then again, that's how he keeps making fortunes for his investors. And, as should be no surprise, he is looking at other refinery assets, even from Valero. With a nice slug of cash -- and willing sellers -- he should have no problem finding bargains.