HollyFrontier to Buy Petro-Canada Lubes Biz


HollyFrontier to Buy Petro-Canada Lubes Biz

HollyFrontiers acquisition of Suncor Energys Petro-Canada lubricants business for CA $1.1 billion (U.S. $845 million), announced Monday, will diversify HollyFrontiers base oil portfolio to include API Group II and III base oils and also make it a prominent player in the finished lubricants market.

Dallas-based HollyFrontier expects to fund the transaction with a combination of debt and cash on hand. Subject to regulatory approval and closing conditions, the transaction is expected to close in the first quarter of 2017.

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Petro-Canada’s refinery in Mississauga, Canada, has a base oil plant with 11,600 barrels per day of API Group II capacity and 4,000 b/d of Group III capacity.

Reuters reported on Oct. 21 that Suncor was auctioning the Petro-Canada lubricants business.

When we announced we were considering divesting of the lubricants business, we had significant interest, and as such we were able to transact with a company that fully recognizes the value of the business, Suncor President and CEO Steve Williams said in its news release Monday.

HollyFrontier President and CEO George Damiris acknowledged in a conference call Monday, I think its always fair to assume that there was a competition here. I think even with that competition, we think we bought a great business at a good price….

Base Oil

The acquisition includes Petro-Canadas Mississauga, Canada, base oil plant, which has capacity to produce 15,600 barrels per day of API Group II and III base oils. In addition, HollyFrontier receives a perpetual exclusive license to use the Petro-Canada trademark in association with finished lubricants.

The acquired assets also include a blending plant. Features include three inline blenders and multi-step batch blending operation. Packaging capabilities range from 1-liter to bulk containers.

According to LubesnGreases 2016 Guide to Global Base Oil Refining, HollyFrontiers Tulsa, Oklahoma, base oil plant has 9,500 b/d of Group I production capacity. The plant also produces agricultural oils, process oils and specialty waxes.

HollyFrontiers Damiris said the company was buying a high-margin business that generates stable cash flows. Importantly, Petro-Canada Lubricants gives us exposure to the strong growth potential for Group II+ and Group III base oils, driven by increasing industry standards, he said. The plant has a flexible configuration, with both a high-pressure hydrotreating and catalytic dewaxing unit, and can process a variety of streaming to produce 99.9 percent-plus pure base oils, some of the purest in the world.

Damiris noted the companys previous plan for a phase two expansion at its Woods Cross refinery that would enable production of Group III base oil. We feel the Petro-Canada acquisition is a far more attractive alternative, he said. In addition to greater feedstock flexibility, [Petro-Canada Lubricants] brings industry-leading product innovation, an extensive brand portfolio and a global sales organization to HollyFrontier.

In response to an analysts question about whether the Woods Cross expansion could potentially come back, Damiris replied, I dont think that project comes back. And I think this deal would probably delay the timing even more, just because we already have a facility now that does what we had contemplated in the phase two expansion.

HollyFrontier forecasts $20 million of synergies from the acquisition, not counting any benefits from feedstock optimization. Damiris added that, we believe we can take… feedstock to come from our Tulsa and Woods Cross refineries to replace some of the current feedstock and make more Group III and Group III+ higher-margin [base] oils and therefore, also more higher-margin finished lubricants and specialty products out of the Mississauga facility.

Finished Lubricants

He said Petro-Canada is very strong in the tailor-made finished lubricants market. The business has 50 R&D scientists, many of them, half of them have PhDs that are really working at the molecular level to develop specialty applications for specific customers, Damiris said.

Adding a base oil plant in Eastern Canada should give HollyFrontier better access to finished lubricants in the Eastern and Midwestern United States. There are huge finished lubricant markets that are closer proximity to this plant than the Gulf Coast, most specifically the East Coast and Chicago markets, he said. So we will definitely have a competitive advantage in those separate markets.

Petro-Canadas finished lubricant brands include Duron, Supreme, Hydrex, Turboflo, Vultrex, Enduratex, Purity FG and Paraflex HT, and it also sells drilling fluids and wax under the Puredrill and Purewax brands, respectively. Also well known as the worlds largest white oil manufacturer, Petro-Canadas brands include Puretol, Purity and Kyrstol, with applications in pharmaceuticals, and in health and beauty. Applications include heavy-duty motor oil, hydraulic fluids, turbine fluids, mining and specialty greases, gear oil and food-grade lubricants.

We think we can pull through some of our Tulsa products into this business and blend it into the formulations that are used in this business to make their finished products, Damiris said. I think we can also leverage the sales and R&D organizations that are inherent into the Petro-Canada Lube business to find new applications, markets and customers for the molecules that we produce in Tulsa.

Amy Claxton, principal of consultancy My Energy in Hummelstown, Pa., said the sale should benefit Petro-Canada parent company Suncor. The acquisition of Petro-Canada Lubricants Inc. by HollyFrontier surely brings a sigh of relief to both Suncor as well as long time PCLI employees, Claxton told Lube Report. Suncor can move forward with full focus on monetizing its equity Canadian oils sands crudes via the Montreal, Quebec refinery, in addition to its Edmonton, Sarnia, and Commerce City refineries.

She explained that oil sands crudes are incompatible with economic base oils production, which has limited Suncors ability to increase oil sands feedstocks to its Montreal refinery. Claxton noted that the Suncor Montreal refinery provides some of the feedstocks to the Petro-Canada Clarkson refinery base oil plant in Mississauga. The Petro-Canada facility in Mississauga is not a standalone refinery, and relies on Suncor material as well as third-party worldwide purchases of vacuum gas oil and hydrocracker bottoms as feed to the base oil plant, she said.

According to Claxton, HollyFrontier provides a North American supply option to address the Mississauga base oil plants long standing feedstock concerns.

HollyFrontier has VGO and hydrocracker bottoms, available to varying degrees from its five-refinery portfolio, for shipment via rail to Mississauga, she pointed out. Most notably, HollyFrontier expanded its Wood Cross, Utah, refinery to process Utahs Uinta Basin waxy crudes in 2014-2015. This expansion was further supported by a 10-year supply agreement with Newfield Exploration Company to supply the refinery with secure supplies of high-wax crudes beginning in 2014. The VGO from this operation can provide high quality feed to PetroCanadas white oil/solvent dewaxing train, she said, as well as to its hydrodewaxing Phoenix train.

Claxton believes HollyFrontiers lubricants business will benefit from PetroCanadas well recognized lubricants R&D expertise, as well as its existing global customer portfolio. There will be many synergies between the merged entities including refining and base oil plant feed optimizations; pipeline, storage, and terminaling opportunities; and base oil and finished lubricant supply logistics, she said.

Ernie Henderson of K&E Petroleum Consulting said that because the Mississauga plant runs hydrocracker bottoms or VGO feeds, expansion opportunities could exist with their wax isomerization and hydrotreating and post fractionation steps. They have debottlenecked in the past, such as in 2006.

Henderson said he will be very interested to see how the purchase impacts the U.S. and North American base oil, wax and lubricants business. HollyFrontier is now a sizable base oil entity offering Group I or I+, as they advertise, Group II, Group II+ and Group III – hence a one-stop shop, he told Lube Report. They are now a leading white oil producer and an even larger wax producer – that is further enhanced from the wax that they import from China. They now also have a lubricants business.

Petro-Canada and Suncor merged in 2009, with the Calgary, Alberta-based companies agreeing the combined entity would operate corporately under the Suncor name, while continuing to use the Petro-Canada brand for refined products. Petro-Canada acquired its lubricants business from Gulf Canada in 1985.

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