Sunday, November 8, 2015

Carlyle Refiner Dumps Bakken Oil: BOEM JV in Jeopardy?

Reuters reported

Philadelphia Energy Solutions has already cut its purchases of oil from North Dakota by 80 percent, switching to imports from Nigeria, Chad and Azerbaijan.

The problem is that the drop off in production has eliminated the discount that Bakken oil traded at to WTI, making it more expensive than oil from other areas that are still suffering from excess supply. Transporting oil by rail can add $10 to the price of a barrel of oil, but importing by tanker only adds $2 to $3 per barrel. The rail transport costs have made North Dakota unattractive for refiners.

“They are looking for the lowest cost supplies,” Sandy Fielden of RBN Energy told Reuters, referring to refiners. “A few years ago, that was North Dakota, but not today.” 
This is a sea change for The Carlyle Group's Philadelphia Energy Solution, which shifted from foreign oil to cheaper domestic crude one year ago.  Recall President Obama's White House helped Carlyle land the Philadelphia refiner, which required public subsidies to develop the rail capability to handle huge amounts of domestic crude.   

PEU Report quoted the company's SEC filing earlier this year:

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.
Carlyle broke out the transportation division, PES Logistics, for a separate $250 million IPO, but neither PES or its logistics division has gone public to date.

In July PES still loved Bakken oil (according to Reuters):

Philadelphia Energy Solutions is pursuing a joint venture that would give the U.S. East Coast refiner greater control over its supply chain out of North Dakota's Bakken oil fields, the company has disclosed in federal filings ahead of a initial public offering.

PES, a joint venture partly owned by Carlyle Group LP , said in a filing that in early June, it entered into a preliminary agreement with Globe Resources Group, parent company of BOE Midstream. The deal would give PES controlling interest in a 210,000 barrel-per-day crude rail loading facility, nearly 1 million barrels of crude oil storage and a 39-mile pipeline in North Dakota.
The filing stated:

On June 9, 2015, PES LLC entered into a term sheet with The Globe Resources Group, LLC ("Globe Resources") relating to a proposed joint venture (the "BOEM joint venture") that would combine the businesses of Logistics and Globe Resources' wholly owned subsidiary, BOE Midstream, LLC ("BOEM"). PES LLC is expected to own its interest in the joint venture through a subsidiary of PES Holdings and will own an 85.25% interest in and control the BOEM joint venture. Globe Resources will own the remaining 14.75% interest in the BOEM joint venture.

BOEM's assets are located in North Dakota and include a 210,000 bpd capacity crude oil loading terminal, 882,000 bbls of tank storage capacity (of which 250,000 bbls of tank capacity is under construction) and a manifest train refined product loading terminal located on a 33-acre site adjacent to the crude oil loading terminal. The BOEM assets also include the Killdeer terminal, which provides 105,000 bbls of tank storage, and a 39-mile, 16-20-inch crude oil pipeline that operates between the Killdeer terminal and the crude oil loading terminal. We currently expect that Refining will contract with or otherwise utilize the crude loading terminal in connection with its purchase of crude to be transported to the Philadelphia refining complex.

BOEM currently has approximately $175 million of outstanding indebtedness under its revolving credit and term loan facility. We expect that the BOEM joint venture will assume or refinance the credit facility at the closing of the transaction and that such facility will not encumber or restrict the operations of Logistics or the MLP, if the Logistics IPO were consummated. In addition, we do not expect that the BOEM joint venture will contribute any of its assets to the MLP in connection with the Logistics IPO; however, if the BOEM joint venture and the Logistics IPO are consummated, we would expect the MLP to have a right of first offer with respect to any BOEM joint venture assets that generate qualifying income for tax purposes.

Except for certain exclusivity and confidentiality provisions, the term sheet is a non-binding agreement. We expect that the proposed BOEM joint venture will be completed in the third quarter of 2015; however, the completion of the transaction is subject to various conditions, including, among others, completion of due diligence and approval of definitive agreements by both parties. There can be no assurance that the proposed BOEM joint venture will be completed on the terms described above or at all. 
There have been no announcements on the deal closing.   Might Carlyle have shifted to foreign oil to get the BOEM assets at a deeper discount?  The folks at Globe Resources should call the Brintons family about how Carlyle snagged their family business via the back door.  Globe executives may want to reach out to Texas families stiffed by Carlyle's Barnett Shale player Vantage Energy.

How will this story turn out?  It might be another Carlyle betrayal, their first in the Bakken's.