How Much is the Marland Refinery in Ponca City Worth?

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The Phillips 66 Refinery in Ponca City, Oklahoma. The refinery in Ponca City, Oklahoma is part of the Refining and Marketing business segment. The three business segments of Phillips 66 have very different ROCE's. In 2011 the ROCE of the Refining and Marketing segment was 12%, the ROCE of the Midstream segment was 30%, and the ROCE of the Chemical segment was 28%. Because the ROCE of the Chemical segments and the Midstream segments is so much higher than the ROCE in the R&M segment, Phillips 66 plans to aggressively grow the Chemicals and Midstream segments of the new company and de-emphasize the Refining and Marketing segment of the company. The Refinery and Marketing segment of the company is the lowest profit margin segment of the company and Phillips 66 plans on selling and shutting down unprofitable assets in this segment. On the plus side, the Ponca City refinery is part of the Mid-Continent segment with about 21% of Phillips 66 capacity and margins have been very strong in this area. In 2011 about 84% of Phillips 66 capital was allocated to Refinery and Marketing with 11% allocated to Chemicals and 5% to Midstream. Phillips 66 plans a major change in this allocation. "Long-term we have a vision that about 50% of our capital employed will be directed towards the R&M segment. And the other 50% will be directed towards Midstream and Chemicals." Derivative Photo: Hugh Pickens

by Hugh Pickens Ponca City, Oklahoma, September 28, 2012

The Phillips 66 Refinery located in Ponca City, Oklahoma, has a crude oil processing capacity of 198,000 barrels per day (bpd) making it by far the largest refinery in Oklahoma.[1] The refinery processes a mixture of light, medium and heavy crude oil. Most of the crude oil processed is received by pipeline from the Gulf of Mexico, Oklahoma, Texas and Canada. Additional foreign crude is purchased into the Gulf Coast and delivered by pipeline. The Ponca City Refinery is a high-conversion facility that produces a full range of products, including gasoline, diesel fuel, jet fuel, LPG and anode-grade petroleum coke. Its facilities include fluid catalytic cracking, delayed coking and hydrodesulfurization units. Finished petroleum products are shipped by truck, railcar, and company-owned and common-carrier pipelines to markets throughout the Mid-Continent Region.[2]

The Phillips 66 Refinery in Ponca City is the most profitable refinery of Phillips 66's fourteen worldwide refineries, contributing a net profit of over $500 million in 2011 to Phillips bottom line, over one-quarter of the net profits for the entire Refining Business Segment. For 2012, profits are on target for the Ponca City Refinery to contribute of over $600 million of net profit to Phillips bottom line, one-third of the net profits for the entire Refining Business Segment.

Contents

Historical Data of Refinery Sales Since 2009

According to transactional data compiled by Bloomberg, eleven refineries have sold in the United States since 2009. One way to compare their valuations is to look at the price paid for each refinery versus the throughput of each refinery in barrels per day (bbl). Under this method for an average sale price of each refinery was of $3,128 per bbl.[3][4]

With a refining throughput of 200,000 bbl, this would give a valuation of $625 million for the Marland Refinery in Ponca City.

Comparison with Phillips 66 Sale of Trainer Refinery

The Trainer Refinery, sold by Phillips 66 to Delta Airlines in June, 2012, is located on the Delaware River in Trainer, Pa., about 10 miles southwest of downtown Philadelphia. The refinery has a crude oil processing capacity of 185 MBD and processes mainly light, low-sulfur crude oil. Trainer receives crude oil by tanker from West and North Africa and Canada. The refinery facilities include fluid catalytic cracking, hydrodesulfurization units, a reformer and a hydrocracker that enable it to produce a high percentage of transportation fuels, such as gasoline, diesel fuel and jet fuel. Other products include home heating oil and low-sulfur fuel oil. Refined products are primarily distributed to customers in Pennsylvania, New York and New Jersey via pipeline, barge and railcar.[5] Photo by Phillips 66

The Trainer Refinery, sold by Phillips 66 to Delta Airlines in June, 2012, is located on the Delaware River in Trainer, Pa., about 10 miles southwest of downtown Philadelphia. The refinery has a crude oil processing capacity of 185 MBD and processes mainly light, low-sulfur crude oil. Trainer receives crude oil by tanker from West and North Africa and Canada. The refinery facilities include fluid catalytic cracking, hydrodesulfurization units, a reformer and a hydrocracker that enable it to produce a high percentage of transportation fuels, such as gasoline, diesel fuel and jet fuel. Other products include home heating oil and low-sulfur fuel oil. Refined products are primarily distributed to customers in Pennsylvania, New York and New Jersey via pipeline, barge and railcar.[6]

CBS Moneywatch reported on June 22, 2012 that Delta Airlines had completed its $180 million purchase of Phillips' Trainer Refinery and the refinery is expected to restart in September, according to filings made with Pennsylvania utility regulators by the Delta subsidiary that will run it, Monroe Energy LLC. Delta said the refinery will hire back about 400 people.[7]

With a sale price of $180 million and a throughput of 185,00 bbl, Phillips sold the Trainer Refinery for $973/ bbl. Under the same valuation rate the Marland Refinery in Ponca City would have a vale of $192 million. Keep in mind however that Phillips 66 closed the Trainer Refinery in September, 2011 precisely because it was not an economically viable refinery.

Comparison with a Phillips Refinery in the Mid-Continent

Realtors say that the value of a property is based on "location, location, location" and the same is true of oil refineries. Phillips 66's most profitable refineries are in the mid-continent and include the Borger Refinery, Marland Refinery in Ponca City, Wood River Refinery, and Billings Refinery.

Phillips Mid-Continent Refineries

Phillips 66 has 15 refineries globally and 2.2 million barrels a day of capacity. "When we think about our refining business we like to think about it in four segments. One is the Mid-Continent, about 21% of our capacity is there. Margins have been very strong in this area, as you know," says Phillips 66 CEO Greg Garland.[8] "Our largest region is the Gulf Coast, about 33% of our capacity is there.We have large economy of scale here. We have very complex refineries on the Gulf Coast. The Western US and Pacific region is about 20%, includes our interests in the Melaka refinery.The West Coast has typically had high margins historically, but the last couple years has been challenged in part due to the economic slowdown in California."[9]

Phillips 66′s most profitable refineries of the past couple years are in what’s called the Mid-Continent — from Texas north to Montana including the Borger refinery, Ponca City, Wood River and Billings. [10] The reason for their high profitability has been the glut of crude oil pouring into the region from newly tapped shale oil plays like North Dakota’s Bakken. "Because there was a lot of new oil and not enough pipeline capacity to get it down to the Gulf Coast mega-refineries, the crude got bottled up in the storage tanks at Cushing," writes Helman. "The bottleneck that kept oil from getting out of Cushing also kept its price at a record-wide discount relative to its rival European benchmark Brent crude.[11] At one point last year you could buy a barrel of WTI for $27 less than a barrel of Brent.[12] In an April conference call with analysts, Garland said the company had been generating $90 million in annual net income for every dollar of WTI-Brent price differential that it could capture for its refineries.[13]

Profitability of Phillips Mid-Continent Refineries

On August 1, 2012 Phillips reported their adjusted earnings for refining operations were $851 million in their 2nd Quarter Earnings Report for 2012. Phillips has taken out R&M earnings attributable to marketing and specialty products($334 million). Phillips also reported the crack spreads for the Mid-Continent, Gulf Coast, Atlantic Basin, and Western Pacific of $26.34, $9.36, $7.76, and $ $7.91 respectively. The total profit for each refinery is calculated by determining the crack spread times the normalized throughput capacity for each refinery to allocate the total refinery profit to each refinery.


Location Capacity (KBD) [A] Normalized Capacity (KBD) [B] Crack Spread ($) [C] Capacity Utilization (%) [A]*[B]*[C] Per Cent Contribution to Total Refining Profits Extrapolated Yearly Profit
Ponca City, OK 198 198 26.34 95 4,995 18 629
Roxana, IL 306 153 26.34 95 3,829 14 486
Billings, MT 118 118 26.34 95 2,953 11 375
Borger, TX 146 73 26.34 95 1,827 7 232
Belle Chasse, LA 247 247 9.36 91 2,104 8 267
Old Ocean, TX 247 247 9.36 91 2,104 8 267
Westlake, LA 239 239 9.36 91 2,036 8 258
Linden, NJ 238 238 7.76 95 1,755 6 223
Whitegate, England 71 71 7.76 95 523 2 66
Humber, Germany 221 221 7.76 95 1,629 6 207
Carson/Wilmington, CA 139 139 7.91 89 979 4 124
Rodeo, CA 120 120 7.91 89 845 3 107
Melaka, Malaysia 76 76 7.91 89 535 2 68
Ferndale, WA 105 105 7.91 89 739 3 94
Total 2,245 28,730 100 3,404


Using this method for 2012, the Marland Refinery in Ponca City will make a contribution to Phillips 66's net profit of $629 million, by far the largest of any of Phillips' refineries.

Valuation of Phillips Mid-Continent Refinery at Billing Montana

The Billings Refinery is located in Billings, Mont. It has a crude oil processing capacity of 58 MBD and processes a mixture of Canadian heavy, high-sulfur crude oil plus domestic high-sulfur and low-sulfur crude oil, all delivered by pipeline. Its facilities include fluid catalytic cracking and hydrodesulfurization units. A delayed coker converts heavy, high-sulfur residue into higher-value light oils. The refinery produces a high percentage of transportation fuels, such as gasoline, aviation and diesel fuels, as well as fuel-grade petroleum coke. Finished petroleum products from the refinery are delivered via pipeline, railcar and truck. Pipelines transport most of the refined products to markets in Montana, Wyoming, Idaho, Utah and Washington.[14] Photo by jonmartin Flicker Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Equities.com reported on September 19, 2012 that Phillips 66 mid-continent refinery at Billings, Montana is assessed at $379,718,534. With a throughput capacity of 58,000 bbl this puts the value of the Billings Refinery at $6,534 / bll.[15][16]

At this rate of valuation, the Marland Refinery in Ponca City would have a valuation of $642 million.

However the Montana Department of Revenue found in July, 2012 July that the Phillips 66 refinery property had “either escaped assessment, been erroneously assessed or omitted from taxation” from 2003 to 2010 and re-assessed Phillips Billing Refinery at $508,333,155 which puts the value of the Billings Refinery at $8,776 / bll.[17][18]

At this rate of valuation, the Marland Refinery in Ponca City would have a valuation of $862 million.

However Phillips has asked Yellowstone District Judge Ingrid Gustafson to block its revised tax assessment, saying it will "suffer irreparable injury absent the issuance of a preliminary injunction." The complaint also said Montana is improperly trying to retroactively raise the refinery's tax assessment from 2003 through 2010 in order to collect more taxes. According to department spokeswoman Mary Ann Dunwell of the Montana Department of Revenue, officials in Helena are reviewing the complaint and plan to file a response.[19][20]

Comparison of Valuations

Valuation Comparable Valuation or Sale Price Throughput $ per barrel of oil throughput Valuation of Marland Refinery in Ponca City at this Rate
Bloomberg Study of 11 Refineries Sold Since 2009 not applicable not applicable $3,128 $625 million
Phillips Sale of Trainer Refinery $ 185 million 180,000 bbl $973 $192 million
Assessed Value of Phillips Refinery in Billings, Montana $ 379 million 118,000 bbl $3,211 $642 million
Revised Tax Assessment of of Phillips Refinery in Billings, Montana [Note 1] $ 509 million 118,000 bbl $4,313 $862 million

Note 1: Phillips has asked Yellowstone District Judge Ingrid Gustafson to block its revised tax assessment, saying it will "suffer irreparable injury absent the issuance of a preliminary injunction." The complaint also said Montana is improperly trying to retroactively raise the refinery's tax assessment from 2003 through 2010 in order to collect more taxes. According to department spokeswoman Mary Ann Dunwell of the Montana Department of Revenue, officials in Helena are reviewing the complaint and plan to file a response.[21][22]

Valuation Based on PE Ratio

The Marland Refinery in Ponca City earned over $500 million in net profit for Phillips 66 in 2011 and is on track to earn $600 million in 2012. With a valuation at the upper range of about $ 900 million, this would be a return of 66% profit for 2012. It is doubtful that Phillips 66 would entertain an offer at this level where the buyer would recoup his investment in just 18 months.

In stock trading, the P/E ratio (price-to-earnings ratio) of a share (also called its "P/E", or simply "multiple") is the ratio of the market price of that share divided by the annual Earnings per Share (EPS).The P/E ratio is a widely used valuation multiple used as a guide to the relative values of companies: a higher P/E ratio means that investors are paying more for each unit of current net income, so the stock is more "expensive" than one with a lower P/E ratio. The P/E ratio can be regarded as being expressed in years: the price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation, earnings growth and the time value of money.[23]

The PE ratio of a mature refining business is pretty low.

Company PE Ratio
Phillips 66 (PSX) 5.99
Marathon Oil (MPC) 7.79
Valero Oil (VLP 10.79

External Links

If you have additional information, insights, or corrections for this report please contact the author at hughpickens AT gmail DOT com.

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References

  1. Bartlesvile Examiner-Enterprise. "ConocoPhillips, Phillips 66 have deep roots in Bartlesville" by Ryan Lance and Greg Garland. May 1,2012.
  2. ConocoPhillips. "Worldwide Refining"
  3. Wall Street Cheat Sheet. "Here’s a Problem for U.S. Oil Refineries" by Meghan Foley. September 27, 2012.
  4. Bloomberg. "BP’s Texas Refinery Sale Shows Volatile Industry’s Decay" by Bradley Olsen. September 27, 2012.
  5. ConocoPhillips. "US Refining as of March 31, 2011"
  6. ConocoPhillips. "US Refining as of March 31, 2011"
  7. CBS Moneywatch. "Delta Air Lines finalizes purchase of refinery" June 22, 2012.
  8. Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
  9. Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
  10. Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  11. Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  12. Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  13. Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
  14. ConocoPhillips. "US Refining as of March 31, 2011"
  15. Equities.com "Phillips 66 Billings refinery sues over property taxes" September 19, 2012.
  16. The Missoulian. "Corporate tax protests a concern in Yellowstone County" July 14, 2012.
  17. Equities.com "Phillips 66 Billings refinery sues over property taxes" September 19, 2012.
  18. The Missoulian. "Corporate tax protests a concern in Yellowstone County" July 14, 2012.
  19. Equities.com "Phillips 66 Billings refinery sues over property taxes" September 19, 2012.
  20. The Missoulian. "Corporate tax protests a concern in Yellowstone County" July 14, 2012.
  21. Equities.com "Phillips 66 Billings refinery sues over property taxes" September 19, 2012.
  22. The Missoulian. "Corporate tax protests a concern in Yellowstone County" July 14, 2012.
  23. Wikipedia. "Price-earnings Ratio

About the Author

Hugh Pickens

Hugh Pickens (Po-Hi '67) is a physicist who has explored for oil in the Amazon jungle, crossed the empty quarter of Saudi Arabia, and built satellite control stations for NASA all over the world. Retired in 1999, Pickens and his wife moved back to his hometown of Ponca City, Oklahoma in 2005 where he cultivates his square foot garden, mows nine acres of lawn, and photographs local events at the Poncan Theatre and Ponca Playhouse.

Since 2001 Pickens has edited and published “Peace Corps Online,” serving over one million pageviews monthly. His other writing includes contributing over 1,200 stories to “Slashdot: News for Nerds,” and articles for Wikipedia, “Ponca City, We Love You”, and Peace Corps Worldwide.

Other Articles by Hugh Pickens about Ponca City

Full Disclosure

I am an independent investor who is a stockholder in Phillips 66 and the purpose of this web site is to follow Phillips 66 to document and understand the company's plans and policies particularly with respect to its Refinery and Marketing Business Segment with a special emphasis on evaluating the impact of Phillips 66 business decisions on the Marland Refinery in Ponca City, Oklahoma. I began building my position in PSX when Phillips 66 went public on May 1, 2012 and am long PSX. I will disclose publicly if I close my position on PSX or go short. Unless stated otherwise, there is a citation for every statement in this article. The only exception is the "Conclusions Section" in this report which includes my own judgments and findings. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Phillips 66 (PSX). I am an advocate that that it would be beneficial for both Phillips 66 and the community of Ponca City for Phillips 66 rename its Ponca City refinery the "Marland Refinery in Ponca City" to honor an oil pioneer who together with Frank Phillips brought prosperity and advancement to Northern Oklahoma.

Updates to the Web Site

This web page is frequently updated so check back periodically to see the latest information on "Phillips 66 and Ponca City." If you have any additional information or insights that you would like to see added to this report on Phillips 66 and Ponca City please contact Hugh Pickens by email at hughpickens AT gmail DOT com.

Copyright

The material in this article is licensed under under the Creative Commons under an Attribution-Noncommercial-Share Alike 2.0 Generic license. Except for short, fair use excerpts, the material on this article cannot be used for commercial purposes without permission of Hugh Pickens. Attribution for use of any material from this article must be provided to Hugh Pickens and if used on the web a link must be provided to http://hughpickens.com.

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