Last updated: February 21, 2014 1:26 am
By Jamie Smyth in Sydney and Emiko Terazono in London
Vitol, the world’s largest independent oil trader, has closed its largest acquisition, spending A$2.9bn ($2.6bn) to buy an oil refinery and a large petrol station business in Australia from Royal Dutch Shell.
The purchase, in which the Abu Dhabi Investment Council sovereign wealth fund also took part, covers Shell’s refinery business in Geelong, which was under threat of closure, and an 870-site retail business along with its bulk fuels, chemicals and part of its lubricants businesses.
The move by oil traders to buy refiners comes as oil majors are quitting the sector in order to focus on more profitable investments, particularly in exploration and production of crude oil and gas. Shell said the sale was part of its plan to dispose of $15bn in assets in 2014 and 2015.
The transaction comes amid a growing appetite among the commodities trading houses for Australia. Trafigura, another big trader, last year spent roughly $800m buying two petrol stations and oil import terminals companies.
Oil traders and executives believe Australia could soon overtake Indonesia as the biggest importer of refined oil products in the high-growth Asia-Pacific region because of the closure of old and high-cost refineries in the country and rising demand from its mining sector.
Ian Taylor, chief executive of Vitol said there were opportunities in the oil products markets: “Australia is a big market and is still growing,” he said.
The purchase is the latest in a shift by commodity trading houses towards a more vertically integrated business model. Vitol and its rivals Trafigura, Mercuria and Gunvor are expanding beyond their traditional role as middleman – selling and buying commodities in a business of large volumes but razor-thin margins – to invest in production, logistics, trading and processing. But the size of more than $2bn is surprising as only five years ago traders considered M&A deals of $100m to be large.
At Shell, Ben van Beurden, who took over as chief executive in January, has embarked on a shake-up of strategy by outlining plans for sharp cuts in the company’s investment spending this year and further disposals to boost cash flow. The company has also retreated from plans to resume Arctic drilling this summer.
Mr van Beurden outlined the change of strategy two weeks after the oil major announced its first profit warning in 10 years. He said the belt-tightening would be marked by “hard choices on new projects, reduced growth investment and more asset sales”.
Shell has divested several downstream businesses, including the sale of refineries in the UK, Germany, France, Norway and the Czech Republic. It has also sold downstream businesses in Egypt, Spain, Greece, Finland and Sweden. It is also looking to sell upstream assets in Nigeria.
The deal with Vitol is subject to regulatory approvals and is expected to close this year. It is the third acquisition by Vitol in the refining sector in the last two years.
In 2012, it bought the 68,000 barrels per day Cressier refinery in Switzerland from Petrolus, the bankrupt Swiss refiner. Last December, it partnered with private equity group Carlyle to buy a 45 per cent stake in Germany’s 260,000 b/d Bayernoil refinery from Austrian group OMV.
Vitol operates two other refineries in Fujairah, United Arab Emirates, and Antwerp, Belgium.
“We, like others, are looking to invest in the whole supply chain,” Mr Taylor told the FT Global Commodities Summit last year.
The wave of big-ticket investment is forcing the traditionally employee-owned commodities trading industry to open up to outside investors, with some trading houses looking to float parts of their businesses or tap the bond market, while others seek investment from private equity firms or sovereign wealth funds.
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Also from Reuters:
Vitol pays $2.6 billion for Shell’s Australian refinery, petrol stations
BY BYRON KAYE AND FLORENCE TAN
SYDNEY/SINGAPORE Fri Feb 21, 2014 6:39am EST
(Reuters) – Top global oil trader Vitol SA VITOLV.UL is buying Royal Dutch Shell’s Australian refinery and petrol stations for about $2.6 billion in its biggest acquisition, looking to grab a share of a growing oil product market.
The purchase will pit Swiss-based Vitol against arch rival Trafigura TRAFG.UL, which became Australia’s largest independent fuel retailer last year in a market where the less nimble oil majors are looking to cut losses.
Australia has become one of Asia’s biggest fuel importers, creating opportunities for traders as the majors have shut older, small refineries, under pressure to shift investment to oil and gas production that generates better returns.
The Australian deal puts Shell comfortably on track to hit its target of $15 billion in asset sales over the next two years, set by new chief executive Ben van Beurden as part of an austerity drive following a profit warning in January.
So far this year, Shell has sold about $5 billion of assets and analysts said the swift pace of disposals could prompt the company to raise its target.
“The speed at which Shell can sell relatively immaterial assets for billions of dollars highlights how unambitious its $15 billion program is. We would expect the disposal target to be raised in due course,” Investec analysts said.
Vitol Chief Executive Ian Taylor said he expects to make good returns from the business eventually, as the refinery, while small, was a high-quality plant, with good distribution chains into the Australian market.
Analysts said the acquisition made sense for Vitol even though Shell couldn’t run it profitably enough to keep it.
“These two companies have different return expectations and targets they’re willing to accept,” said Craig Pirrong, Professor of Finance at the University of Houston.
With the Australian purchase, which includes 870 service stations plus Shell’s bulk fuels, bitumen and chemicals businesses, Vitol is betting Australian fuel demand will continue to grow faster than in Europe, and eventually the world will be short of refining capacity.
“Longer term, yes, we are making a bet that refining will actually be a cyclically good business. And that’s what we’ve found so far, by the way,” Taylor told reporters in Melbourne, hours after signing the deal at the refinery in nearby Geelong.
It was also attracted to the country as it has a free market, in contrast to other places in Asia where oil product prices are heavily controlled, Taylor said.
He said Vitol would not be interested in a stake in the retail business China’s Sinopec Corp has put up for sale.
Shares in Shell traded up 0.2 percent at 6.32 a.m. ET, in line with Britain’s bluechip index .FTSE.
HOTBED FOR TRADERS
Dutch-owned Vitol has refining operations in the United Arab Emirates and Antwerp, and formed a joint venture with private equity firm Carlyle Group in December called Varo Energy to own refining and distribution assets in Switzerland and Germany.
Taylor confirmed that the Abu Dhabi Investment Council sovereign fund was part of the group that bought the assets, but declined to name other parties who may take an equity stake in the deal, which is expected to be partly debt funded.
Vitol joined the race for the Australian petrol stations after Trafigura’s Puma Energy arm bought two fuel distributors last year.
Others eyeing the market include South Korean refiner S-Oil, which said last month it was in exclusive talks to buy a stake in Australia’s United Petroleum, a privately owned business valued at about A$1 billion, including debt, that received a number of approaches from international companies following Puma’s takeover of Ausfuel.
Australia’s refineries, owned by Shell, BP, ExxonMobil and Caltex, have mostly booked losses over several years as tighter fuel quality standards and mega-refineries in Asia have made them uncompetitive.
Rather than spend money on upgrading plants, the majors have been looking to sell them or turn them into fuel import terminals. Taylor said Australia was likely to need more fuel terminals in the long run, an opportunity Vitol would look at.
Shell, which retains substantial gas interests in Australia as well as a $7 billion stake in Woodside Petroleum, was making tough choices to improve its overall competitiveness, CEO van Beurden said in a statement.
Analysts and bankers say Shell may consider selling its 23.1 percent stake in Woodside to help meet its $15 billion disposal target, which equates to about 6 percent of Shell’s market value.
The company generated $1.7 billion of divestment proceeds last year.
Earlier this week, Shell offloaded its Italian retail business for an undisclosed price, reported in the Italian press as to 500 million euros. In January, it also sold a stake in a gas project in Western Australia for $1.1 billion and a stake in a Brazilian oil project for $1 billion.
It has already sold downstream assets including refineries in the UK, Germany, France, Norway and the Czech Republic.
“The new (Shell) management is being ruthless in cutting out anything that they think is extraneous to their core,” said Al Troner, President of Asia Pacific Energy Consulting in Houston.
(Additional reporting by Sonali Paul in MELBOURNE and Cezary Podkul in NEW YORK and Sarah Young in LONDON; Editing by Richard Pullin and Erica Billingham)