Lubes, Diesel Offers Holly Opportunity

Dallas-based Holly Corp. is taking on a complex lubes facility that has the ability to rearrange molecules to create higher value.
Holly looked at several refineries over the last 10 years but took a pass until this deal. The former Sun Refinery, which for years focused on making lubricants and oils over gasoline, is not a run-of-the-mill refinery.
Since it is primarily a lubes refinery, it’s a good bet it will be profitable, said Dave Lamp, Holly Corp. president. Lamp joined Holly chairman and CEO Matthew Clifton and other executives at the refinery last month during an official introduction.
The acquisition increases Holly’s overall refining capacity by more than 60 percent to 216,000 bpd while adding the Mid-Continent to the company’s existing Rocky Mountain and Southwest markets.
“It is a good fit for us because it gives us a diversification of earnings,” Lamp said.
The 85,000-barrell-a-day facility at 1717 Southwest Blvd. is an entirely different profit center for the company, he said.
“No. 1, it is in the Mid-Continent and the lubrications is a specialty business. We think it gives us a niche status from that standpoint,” Lamp said.
Clifton echoed the point.
The profitability of the lubes sector for Sun was evident as they negotiated purchase. Also, the refinery benefited from the production of jet fuel and diesel jet fuel, he said.
“When we first started talking margins were very good. Of course they walked down over time,” Clifton said. “Demand is off this year and that has marked a reduction in profit margin.”
Holly Corp. remains fiscally conservative, entering the Mid-Continent with little debt. The company recently raised $200 million in long-term debt and the bulk of that is in cash, Clifton said.
Holly will remain fiscally conservative because the refinery business is a capital intensive business trying to function in a volatile market, Clifton said.
“You have to have the financial wherewithal to keep re-investing in equipment,” he said.
The U.S. Environmental Protection Agency has given Holly Corp. until November 2011 to build units capable of making ultra-low sulfur diesel, which is required by railroads and over-the-road, 18-wheel trucks. The ultra-low diesel is environmentally friendly and more profitable. Previously, EPA had given Sun a pass on building the equipment. Holly will spend $125 million on a 25,000 barrel-per-day diesel desulfurizer.
Long term, Holly executives see that diesel will continue to be a strong product relative to gasoline.
“Particularly because gasoline has regulatory headwinds,” Clifton said.
Events like renewable fuels entering the gasoline pool and the impact of cap-and-trade legislation are making a negative impact on gasoline demand.
“We like the geo-diversification we have, adding the Mid-Continent to our Southwest and Rocky Mountain assets protects our market diversification,” Clifton said. The strong diesel production adds strength.
Clifton was surprised that Sun Oil had not spent a lot of money adding units to the facility in a long time.
“They did spend a fair amount of money maintaining the units still operating,” he said. “They were in good condition.”
And, the more Holly executives were exposed to the staff, the more impressed they were, he said.
“We saw that they had invested a lot of money in training. These are great people, from the manager on down.”
Energy Organizations On Opposite Ends of Bill
Two energy organizations react in opposite ways in response to passage of the American Clean Energy and Security Act in the House of Representatives.
America’s Natural Gas Alliance – a consortium of 26 leading independent natural gas companies that comprise more than 40 percent of total U.S. natural gas production – called the passage “unfortunate.”
“The version of the energy bill may have the unintended consequence of making it more difficult for our nation to reach its clean energy goals,” ANGA said. “For example, its allocation of free allowances to enable continued coal use will lead to the inability of natural gas to fulfill its low-carbon electric generation potential that includes very significant under-used generating capacity already in place. America’s Natural Gas Alliance looks forward to working with the Senate to address these concerns as the legislative process moves forward.”
The American Wind Energy Association, meanwhile, congratulated House Speaker Nancy Pelosi, Chairmen Henry Waxman and Edward Markey, and the entire House leadership for “successfully adopting energy legislation that includes a Renewable Electricity Standard.”
“This is a key first step in balancing our electric generation mix by expanding America’s renewable energy generating capacity and creating thousands of new American manufacturing jobs,” said AWEA CEO Denise Bode.
ANGA, however, believes any policy to reduce greenhouse gas emissions should encourage the lowest, most cost-effective carbon emissions possible as soon as possible. Natural gas is more than 50 percent cleaner than coal and it’s abundant in North America.
“Any alternative energy future must have natural gas as a significant foundation for supplemental renewable sources such as wind and solar to keep the power flowing when the wind doesn’t blow and the sun doesn’t shine. As such, policies that promote a reduction of GHG emissions should encourage, not inhibit, the production and use of natural gas,” ANGA said in a statement.
EPA to Review Hydrofracing
The House voted out a spending bill that calls on the U.S. Environmental Protection Agency to examine the risks of hydraulic fracturing to the nation’s drinking water.
Arkoma Connector Expansion Considered
MarkWest Pioneer LLC launched an open season/reverse open season to determine whether to expand its Arkoma Connector.
The 50-mile interstate natural gas pipeline starts at the outlet of MarkWest’s Sprague treating plant in Coal County, reaching an interconnection with the proposed Mid-Continent Express Pipeline in southeast Oklahoma.
Designed to deliver 625,000 Dth/d, the Arkoma Connector would provide needed capacity to transport Woodford Shale production to eastern U.S. markets.
Enterprise Products, TEPPCO Partners Merge
After rejecting a $2.8 billion takeover proposal from Enterprise Products Partners LP in April, TEPPCO Partners agreed to merge with Enterprise to form the largest publicly traded energy partnership with an enterprise value of more than $26 billion.
The stock deal is valued at about $3.3 billion.
The partnership will retain the name Enterprise Products Partners LP and will access the largest producing basins of natural gas, natural gas liquids and crude oil in the U.S. It will also serve some of the largest consuming regions for natural gas, NGLs, refined products, crude oil and petrochemicals.
The combined partnership will own almost 48,000 miles of pipelines comprised of over 22,000 miles of NGL, refined product and petrochemical pipelines, over 20,000 miles of natural gas pipelines and more than 5,000 miles of crude oil pipelines.

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