Friday, June 21, 2019

Explosions at Carlyle Group's Philadelphia Refinery

Three explosions rocked Philadelphia Energy Solutions (PES) refinery early this morning.  Philadelphia Inquirer reported:

A series of explosions ripped through a refinery in South Philadelphia early Friday, lighting up the night sky and triggering a massive fire.
Gasoline prices rose in the aftermath of the blaze.

Wholesale gasoline prices surged 3.7 percent Friday in New York on speculation that the PES outage might curtail regional fuel supplies.
PES went bankrupt in early 2018, after The Carlyle Group loaded the company with debt used to pay Carlyle massive dividends.  Carlyle tried to take PES public in August 2015 but low energy prices derailed the IPO.

Seeking Alpha explored the bankruptcy and was puzzled by the refinery's agreement with its former rail terminal, which received millions in public funding.

The Carlyle Group spent $175 million in 2012 to acquire a two-thirds stake in PES Holdings, but in return it had to obtain full operational control of the company. PES Holdings was in desperate need of a capital injection at the time in order to upgrade its operations and stay relevant in the refining space.
Under new management, PES Holdings spent $100 million building a rail terminal to receive Bakken crude and $30 million upgrading that facility. By 2015, North Yard Logistics LP was spun off and Carlyle Group decided to buy a stake in the spin-off.
So Carlyle was in full operational control and on both sides of the logistics deal, which it too planned to take public.  Investors don't want to buy a company that has an at risk revenue stream.  Carlyle shored up logistics revenue for North Yard/PES Logistics Partners:

North Yard Logistics LP signed a minimum volume agreement with PES Holdings, where PES agreed to take in 170,000 barrels of oil per day for ten years through that terminal. PES would pay North Yard $1.95 per day to load and unload those barrels, which is equal to a quarterly minimum payment of $29.835 million or an annual payment of almost $120 million. Loading and unloading fees above that volume would be only $0.51/barrel. There were also inflation escalators built into the contract.

During the first half of 2014, the rail terminal's utilization rate was nice and high at 91%, but that was back when it only had 140,000 bpd of capacity.

Various SEC filings provide different capacity figures, as PES Logistics Partners noted that the rail terminal's capacity was going to be increased to 210,000-240,000 bpd, while Energy Transfer Partners LP noted that capacity was going up to 280,000 bpd. It comes down to what types of trains are carrying the crude across America, newer trains means the terminal can offload larger volumes of crude per day.

PES Holdings' utilization of that rail terminal dropped precipitously from 2015 to 2017. Recently, its utilization rate has moved below 30% as PES has only been shipping in 58,000 bpd through the rail terminal. PES still has to pay $120 million per year to North Yard, but that will probably change post-bankruptcy.
PEU Report noted Carlyle's reliance on train shipped oil in early 2015.  Within nine months the picture changed and PES relied on African oil delivered by ship.

PES turbulent PEU ownership isn't over.  Carlyle lists the company as a current holding and promotes its ownership via a value creation video.  As in the case of nursing home giant ManorCare. Carlyle's value can be someone else's destruction.

Update:  ZeroHedge reported on the fire but missed the Carlyle Group ownership connection.

Update 6-26-19:  PES will permanently close its oil refinery (source Seeking Alpha)  PES has no news story on its website about the closure.  Philadelphia Inquirer said owners would position the refinery for a sale and restart.

Update 7-22-19:  ZeroHedge reported PES filed for bankruptcy for the second time in two years.  The Carlyle Group got not one mention in the story.