Engineering News

Refinery Investor Seeks A Hat Trick
April 09, 2010

Thomas O'Malley, a Wall Street trader turned oil-industry consolidator, is returning cash-rich to the U.S. refining business as energy giants have decided they want less to do with the gritty, low-margin business.

The 68-year-old chairman of Swiss-based Petroplus Holdings AG Thursday agreed to pay $220 million for a Delaware refinery that he once owned and sold to Valero Energy Corp. The deal, through an investment group he runs that is backed by Petroplus and private-equity firms Blackstone Group and First Reserve Corp., is the first under a $2 billion fund to acquire U.S. refineries.

Mr. O'Malley made billions for himself and backers during a long career of buying Big Oil's castoffs at market bottoms, then flipping them as conditions improved. "There are times when going against the tide turns out to be the right thing," he said in an interview last month at a vacation home in Arizona.

In the 1990s, he transformed then-tiny Tosco Corp. into the nation's largest independent refiner before selling it to Phillips Petroleum, now ConocoPhillips, for $7 billion in 2001. He then took over Premcor Inc. and did it all over again, selling it to Valero four years later for $6.9 billion in cash and stock.

"He has probably bought and sold more refineries than anyone else," said David Foley, senior managing director at Blackstone Group. He insists Mr. O'Malley can achieve a hat trick despite forecasts of a long-term decline in demand for motor fuels.

"We're not doing this to get modest rates of return because of risk. It's risky. [But] last time we did it, we made six times our money," said Blackstone's Mr. Foley.

The Delaware City refinery purchase is unlikely to be the investment group's only deal. It is already considering acquiring another Valero refinery in New Jersey, Mr. O'Malley said. And he said it would look at any major U.S. refinery that is put on the market.

"I like 'em big. I like them well located," he said.

Mr. O'Malley, who learned to wheel-and-deal as head of oil trading at Salomon Inc.'s Phibro, is a tough cost-cutter who buys refineries on the verge of closing or already closed -- and dangles a restart or the threat of shut-downs to wring concessions from unions and governments.

After buying a Trainer, Pa., refinery in 1996, he kept it closed to pressure the union to agree to his cost-cutting demands, including the elimination of about 80 hourly workers.

"Greed and ego mixed together put a lot of people out of work," said Denis Stephano, who was then the refinery's union-local president and remains in charge now. "We're just commodities to him."

In Delaware, Mr. O'Malley arrived on the scene after Valero mothballed the refinery, saying it had "exhausted all viable options" of selling or keeping it running. The plant had suffered losses of up to $1 million a day last year, Valero Chief Executive Bill Klesse said last year.

The United Steel Workers Union has agreed to job cuts at the Delaware City refinery, and Delaware is providing tax incentives to reopen the plant.

"O'Malley did a good job with Premcor," said Gary Beevers, lead negotiator for oil workers for the USW. "He said he'll take a chance, and I think he'll make a go of it," Mr. Beevers said.

The new U.S. investment venture comes amid setbacks at Petroplus. In 2006, Mr. O'Malley and a crew of Tosco and Premcor colleagues joined Petroplus, then owned by private-equity firms Carlyle Group and Riverstone Holdings, to introduce their roll-up strategy in Europe. They quickly bought five refineries from Shell, Exxon and others, and took the company public in late 2006.

But the deal-making has fizzled. Petroplus hasn't made a new acquisition since 2007. This month it said it would consider selling a refinery near Strasbourg, France, and last year suspended operations at a British refinery after failing to find a buyer. Petroplus shares now trade for less than a third of their IPO price.

Others that have tried to emulate Mr. O'Malley haven't done well recently. CVR Energy Inc., formed in 2006 by a group of Coastal Corp. executives backed by Goldman, Sachs & Co. and Kelso & Co. to acquire U.S. refineries, bought only one since its founding. A CVR executive declined to comment.

The U.S. market has changed since Mr. O'Malley's last successes. The Obama administration's support of greenhouse-gas legislation through a tax on carbon or cap-and-trade system could further upend the already tough economics of refining.

Mr. O'Malley worries about costly regulation but insists the industry is cyclical and eventually margins -- down significantly from 2007 highs -- will rebound. "I've seen a fair number of ups and downs in the 30-odd years that I've had some association with the business," he said.

Source: The Wall Street Journal

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