Sunday, February 22, 2015

Oil Refining: Carlyle's Trains Stall Ships


Reuters ran an odd story about six oil tankers lingering as they attempted to deliver crude oil to Philadelphia Energy Solutions (PES), a Carlyle Group affiliate.  The delays began in November and lasted as long as eleven weeks.

All six of the tankers appear to have been destined for Philadelphia Energy Solutions, the 335,000-barrel-per-day (bpd)refinery co-owned by The Carlyle Group and a subsidiary of Energy Transfer Partners, L.P.. Five of the cargoes were imported by the company itself or banks that finance their supplies, according to customs data. The sixth discharged at a Delaware River terminal used by PES, tracking data show.

One person familiar with the tankers said they are "drip feeding" crude into the plant, a rare set-up that may be caused by a lack of onshore storage space for these particular varieties of crude, or limitations on the rate at which the infrastructure can receive supplies, the person said.
 
On October 8, 2014 Reuters reported PES would  take over oil supply logistics and trading from JP Morgan.. 

Bank of America Corp has clinched a deal to provide inventory and working capital financing to the biggest oil refinery on the East Coast, replacing JPMorgan Chase & Co with a revamped arrangement that excludes physical supplies, according to a source familiar with the deal.

The agreement with Philadelphia Energy Solutions (PES), sealed on Tuesday, will give Bank of America's commodities business one of the biggest such financing arrangements in the country, but excludes the physical oil trading and logistics operations that were part of the JPMorgan pact, the source said.

In the new deal, PES will take over its own logistics and tradingBank of America will ensure payment to the refiner's suppliers and help it hedge its price risk .
Consider the varied possibilities from this switch alone:  Was there a poor pass off from JP Morgan?
How capable was PES internal logistics group?  How much did short term financial considerations enter into the picture?  How might PES finances look better as a result of holding ships in port and drip feeding supplies?

Never underestimate Carlyle's ability to manipulate the financial picture.  Carlyle announced on February 17 it filed to take PES public.  The S-1 provided clear information on why ship offloading slowed dramatically.  The refinery increased cheaper Bakken crude 622%.  Bakken crude is delivered by rail car, not ships

The capacity of the North Yard terminal was expanded to 280,000 bpd in October 2014, allowing Refining to significantly increase the volume of domestic crude oil it processes. As a result, domestic crude oil comprised 65% of our crude oil slate in the fourth quarter of 2014 compared to 9% of our crude oil slate in the fourth quarter of 2012 (the first full quarter of operation of the Philadelphia refining complex under our ownership). On January 1, 2015, the North Yard terminal was contributed to Logistics, our wholly owned subsidiary. In connection with this contribution, Logistics and Refining entered into a long-term, take-or-pay commercial agreement with minimum volume commitments and related services and secondment and easement agreements. Accordingly, as of January 1, 2015, we conduct our operations through two business segments, refining and logistics, which are operated by Refining and Logistics, respectively. For periods beginning with the three months ending March 31, 2015, we expect to provide financial information and operating data on a segment basis.  
For those wanting to buy into PES consider Carlyle's plans to monetize the Logistics division separately:

Following this offering, and subject to market conditions, in order to grow our logistics segment, we intend to explore an initial public offering of a growth oriented master limited partnership ("MLP") that owns a substantial portion of our logistics segment and that will be focused solely on providing logistics services to Refining and third parties (the "Logistics IPO"). 

If consummated, we expect to retain 100% of the general partner interest and incentive distribution rights, as well as a significant portion of the limited partner interest in the issuer. .
 
Here's what Reuters missed in their stalled ship story:

We (PES) have made capital investments in a number of organic growth projects discussed below, including the North Yard terminal, and developed a network of supply relationships to transform the Philadelphia refining complex from a facility that primarily relied on waterborne foreign crude oil to one that can receive and process up to 80% domestic crude oil

Other factors in PES use of crude oil could include two "flaring events."  A refinery fire in early January reduced the refinery's operating capacity by half.  The second occurred just two days ago.

Oil trains carry a different fire risk and that is clearly growing, alongside Carlyle's expected profits on PES.  Philly.com reported:

North Dakota crude makes its way to Philadelphia on dedicated "unit trains" that contain 100 or more railcars. Each train typically contains about 70,000 barrels, or nearly three million gallons, of petroleum.

On their five-day journey to the East Coast, the trains are handed off in Chicago to CSX or Norfolk Southern, the two carriers that serve Philadelphia.

"We bring in nearly six miles of train a day for unloading at our facility. It's an amazing kind of thing to see."--PES CEO Phillip Rinaldi

More than 700,000 people in the region - including 400,000 in Philadelphia - live within a half-mile of the rail lines that carry crude oil.

There's much to be gained by asking questions and researching issues.  SEC filings and analyst calls often provide answers or insights.  I expect to learn more as Carlyle updates Philadelphia Energy Solutions' SEC filings.

Update 3-8-15:  An oil train wreck in Galena, Illinois punctured seven oil cars.  Flames could be seen rising high into the sky.  The destination was Carlyle's Philadelphia oil refinery,(Bloomberg)

Update5-23-15:  After the deadly Amtrak train wreck in Philadelphia, Carlyle's refinery had its third fire this year.

Update 9-6-15:  Carlyle benefits from using discounted domestic crude and wants to hold on to this distinct profit advantage.

Update 1-11-16:  Ships are winning again at Carlyle's Philadelphia refinery.  I wonder how this shift might impact a PES Logistics IPO.

Update 12-8-16:  CEO Rinaldi announced his retirement.

Update 12-11-16:  PES had another fire.