Sunoco and Holly, Tulsa Refinery Hot Potato (SUN, HOC)

Sunoco, Inc. (NYSE: SUN) has signed a definitive agreement with a subsidiary of Holly Corporation (NYSE: HOC) to sell Holly its 85,000 barrel/day refinery in Tulsa, Oklahoma, for $65 million. The sale includes the refinery’s crude oil inventory, which will be priced at market value on the day the deal closes. Sunoco expects the deal to close on June 1st.

Sunoco announced last November that it was cancelling plans to upgrade the Tulsa plant and that it was looking for a buyer.  The Tulsa refinery has been in operation for nearly 100 years, and employs about 400 people. Holly plans to upgrade the refinery, adding a new de-sulfurizer which will allow the plant to produce ultra-low sulfur diesel fuel. The upgrade is expected to cost $150 million and to be finished by the end of 2011.

Holly said the addition of the Tulsa refinery will expand its capacity to 216,000 barrels/day, and add a mid-continent market to the company’s existing markets in New Mexico and Utah. Holly expects to fund the acquisition from cash on hand and its $300 million revolving credit facility.

Holly is paying a nearly rock-bottom price for the Tulsa refinery, and the investment the company is making in ultra-low diesel fuel production should pay off in the long run.

Neither Sunoco nor Holly shares have generated any action in pre-market trading. Sunoco shares closed yesterday at $27.77, a modest gain. Holly shares closed with a modest loss yesterday, at $21.10.  In the grand scheme of things this is a small transaction, as Sunoco’s market cap is $3.25 billion and Holly’s market cap is $1.06 billion.

Paul Ausick
April 16, 2009