US giant tipped for Marsden Pt

Shares in New Zealand Refining gained 4.9 per cent as talk swirls around a possible bid. Photo / Northern Advocate

Valero Energy Corp, the largest US refiner, is reported to be considering a bid for New Zealand Refining Co, operator of the Marsden Point oil refinery.

San Antonio-based Valero may seek full ownership of, or a stake in, New Zealand's lone refinery, said two people familiar with the process, who would not be named because discussions are confidential.

The report comes a day after the Government moved to ease rules on foreign investment

Shares in New Zealand Refining gained 4.9 per cent.

As much as 36 per cent of the refiner may be for sale given reports that Exxon Mobil is joining Royal Dutch Shell in quitting New Zealand's retail fuel market.

Falling global processing margins may highlight the appeal of the New Zealand plant's fee structure, which guarantees minimum revenues, according to analysts and investors.

"It's not your standard model around the industry," said John Kidd, who follows the stock at McDouall Stuart Securities in Wellington. "It makes the New Zealand refinery more akin to an infrastructure-type asset. Because it's a toll processor, it's perhaps a little less exposed to the cyclicality of the oil end of the business."

New Zealand Refining, controlled by the local units of Shell, Exxon, BP and Chevron, rose 35c to close at $7.50, valuing the company at $1.7 billion. It was the biggest gain since February 4.

Shell, Europe's largest oil company, will soon consider bids for its 17 per cent holding in the refinery.

Exxon Mobil, the biggest US oil company, has hired Goldman Sachs JBWere to find a buyer for its 19 per cent stake and 183 New Zealand filling stations.

Possible buyers for Shell and Mobil stations include an Indian state-owned oil company, France's Total, Progressive Enterprises and The Warehouse, according to market speculation.

Valero is accelerating efforts to expand overseas because of concern federal climate legislation may cut the profitability of US plants. Its plans to take a stake in a refinery in the Netherlands unravelled last month when majority owner Total exercised its right to increase its holding.

Legislation passed by the US House of Representatives last month will impose higher carbon costs on domestically made fuel than on imports. If the bill becomes law, the equivalent of one in six US refineries may close by 2020, according to the American Petroleum Institute.

Valero chief executive Bill Klesse declined through a spokesman to comment on a possible New Zealand Refining bid. Last month, he said he would consider acquisitions in the Pacific to meet expected Asian demand growth. The company wants only refineries with access to tankers, that can process cheaper, heavy grades of crude oil and can make diesel.

"We're very, very particular about any purchases that we might make," Valero spokesman Bill Day said on Thursday.

Contracts with Marsden Pt's major shareholders guarantee a minimum revenue with processing fees based on Singapore refining margins adjusted for freight costs. Fees are capped at a maximum $9 a barrel on average for any one year.

"It's an attractive asset," said Paul Robertshawe at Tower Asset Management, which used to own the stock. "With a bit of liquidity and at the right price, we would be there again" should the sell-down bring shares into the market, he said.

Under New Zealand law, anyone buying more than 20 per cent of the refinery must make an offer for the company or get shareholder approval to hold a lesser amount.

Shell favours selling its 230 filling stations along with the refining stake. It was quitting retailing as part of a global focus on exploration and production, the company said in May.

That might limit interest among refiners, said Robertshawe. Existing holders BP and Chevron are also unlikely to want to increase their stakes in the refinery.

"None of them really want to commit a huge amount of capital down here," he said. "Maybe Caltex is the exception given their position in Australia."

Caltex Australia, half-owned by Chevron, operates refineries at Kurnell in Sydney and Lytton near Brisbane. In May, it agreed to pay A$300 million ($373 million) for Exxon's Australian filling stations.

The number of New Zealand filling stations fell about 20 per cent in the past six years as margins for smaller outlets declined, according to a 2008 report by analysts Hale & Twomey. Three of the majors suppliers lost market share after supermarkets offered discounts in 2006.

"The margins are pretty damn tight," BP Oil New Zealand spokesman Neil Green said. "To come into New Zealand by itself would be a huge ask, unless you can tie it into something else in the region, just in shipping volumes alone."

THE REFINERY
* The New Zealand plant, started in 1964 to process heavier-grade Middle Eastern crude, last year handled about 107,000 barrels a day.
* It processes 70 per cent of NZ's fuel and will this year complete a $180 million upgrade to increase output by 15 per cent.

- BLOOMBERG