Sunday, March 8, 2015

Burning Oil Train's Destination: Carlyle Group Refinery

Bloomberg reported:

A BNSF Railway Co. train carrying Bakken oil for Mercuria Energy Group Ltd. continued to burn in rural Illinois two days after it jumped the tracks.  Five of the BNSF train’s 105 cars remained on fire after Thursday’s derailment

Twenty-one of the train’s 105 cars, which include two sand cars as buffers, jumped the tracks Thursday afternoon near Galena, Illinois, about 160 miles west of Chicago. The U.S. Department of Transportation said 14 cars were in a pileup and half of those were punctured. Emergency responders evacuated a 1-mile radius, which contained six homes. 

From here we launch into the arena of high finance.  Consider the hauler, owned by Warren Buffett.

“An initial pool fire occurred that we believe impacted five rail cars and that fire continues to burn,” BNSF, a unit of Warren Buffett’s Berkshire Hathaway Inc., said Friday in a statement about the Illinois crash. “Local, state and BNSF Railway emergency personnel are on the scene working to contain the incident.” 
Local and state emergency personnel are generally taxpayer funded.  Recall how much America's billionaires hate paying taxes.

The next layer of finance is a Mediterranean commodity trader operating from Switzerland.

Mercuria, a Cyprus-based commodity trader, owns the crude and was working with the railway to investigate the accident, Matt J. Lauer, a Mercuria spokesman, said by telephone from Geneva. The oil was loaded at Bakken Oil Express LLC’s terminal in Eland, North Dakota, Joe Shotwell, operations director at the complex, said by phone on Friday. 

Mercuria was shipping the oil to Philadelphia Energy Solutions LLC’s refinery in Philadelphia, a person familiar with the situation said, while asking not to be identified because the information isn’t public. The company will work to fulfill the plant’s order with alternative supplies, the person said. 
Mercuria. which "is registered in Cyprus and has its main trading operations in Geneva", took over J.P. Morgan's commodities unit in October 2014.  What started as an announced $3.5 billion deal shrunk to $800 million by execution. 

The Carlyle Group owns Philadelphia Energy Solutions, which until recently employed J.P. Morgan's commodities unit for trading, inventory handling and logistics.  Carlyle contracted with Bank of America for working capital financing and hedging of price risk.  Carlyle's PES took over its own logistics and trading. It will be happy to take Mercuria's alternative supplies.

Philadelphia Energy Solutions recently expanded its ability to accept 280,000 oil barrels per day by train. That's 400 train cars a day, 146,000 per year.  PES IPO filing states:

Logistics has operated a crude oil rail unloading terminal with the capacity to unload four crude unit trains per day, or 280,000 bpd (the "North Yard terminal"), which provides certain logistics services to Refining. The North Yard terminal is located adjacent to the Philadelphia refining complex and is the East Coast's largest crude oil rail unloading terminal. The separation of our business into the refining and logistics segments provides flexibility in how we allocate capital and access capital markets, in order to balance the growth of our businesses and the return of capital to our stockholders. We intend to explore growth opportunities in both of our segments, either organically or through third-party acquisitions. These growth opportunities could include investments either upstream, downstream or within our current operations, including opportunities at the Philadelphia refining complex. Following this initial public 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"). 

"Intend to explore an IPO"?  It's well beyond that for PES Logisitcs.  Carlyle filed for a PES Logisitics IPO on 9-22-14 and has updated the filing twice since.  The refinery filing came on 2-17-15.

Despite the language stated above, which implies an investor might get part of the logistics segment, Carlyle is actively pursuing IPOs for both divisions. 

MLPs, like private equity underwriters (PEU), pay preferred tax rates.  First responders, be sure to remember Berkshire's Warren Buffet and Carlyle's David Rubenstein the next time a derailed oil car ignites into a fireball.  This is but one face of PEU profits over people.