ConocoPhillips (COP) plans to either sell or close its refinery unit in Trainer, Pennsylvania, as well as associated pipelines and terminals, after being unable to cope with foreign imports, lower fuel demand and strict regulations. The move also reminds us of the U.S. oil company’s objective to get rid of unprofitable refinery units.
The company’s intent was made more obvious by its decision to immediately idle the facility and eventually permanently close the Trainer refinery, should it fail to ink any divestiture agreement within six months. The proposed sale would result in a non-cash asset impairment charge of about $300 million in the third quarter of 2011. Plus the closure would make the East Coast more dependent on energy imports from Europe and Eastern Canada.
The Trainer refinery –– located on Delaware River in Trainer, Pennsylvania –– processes 185 thousand barrels of mainly light, low-sulfur crude oil daily. The unit receives crude oil from West Africa and Canada and generates high proportions of transportation fuels, such as gasoline, diesel fuel and jet fuel, along with home heating oil, residual fuel oil and liquefied petroleum gas. It mainly serves Pennsylvania, New York and New Jersey.
Conoco has the same plan for its Bayway refinery, located on New York Harbor in Linden, New Jersey. This facility processes 285 thousand barrels mainly light and low-sulfur crude oil per day. It distributes its refined products to East Coast customers and receives the crude from the North Sea, Canada and West Africa.
In recent times, the East Coast refinery units have been experiencing poorer margins because the companies are finding it more expensive to remain competitive. Sunoco Inc. (SUN) also intends to sell or idle its 500 thousand barrels per day Marcus Hook and Philadelphia refineries in Pennsylvania.
Conoco, which remains busy to spin off its refinery unit by next year, continues to be optimistic on its ability to generate free cash flow by unlocking capital tied up in non-core assets. The idea behind the spin-off is to create value for shareholders who like the volatility in the refining business. Creation of two separate companies is also believed to be helpful in ways that the two arms will get to pursue greater opportunities in their respective market segments, without the constraints of the parent company, and better serve the needs of both investor groups. We are also hopeful of a narrower return gap that the company has been facing historically.
However, the company’s performances are weighed down by unpredictable global economic conditions and uncertain oil and natural gas prices. Hence, we maintain our long-term Neutral recommendation on ConocoPhillips, the third-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) and Chevron Corp. (CVX).
Conoco holds a Zacks #3 Rank, which translates to a short term ‘Hold’ rating.
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