Valencia Asphalt Company Follows Pipeline to Arizona
Asphalt is a hot, dirty business whose fortunes often depend on the whims of government highway spending or OPEC oil ministers. So you look for opportunity where you can find it. Juan Y. Forster thinks he’s found it next to a pipeline in Arizona.
Forster is president and chief executive of Huntway Partners, a Valencia producer of liquid asphalt--the oil-based product that is mixed with rocks to create the asphalt used for paving and roofing.
Huntway competes mostly in California, where its two refineries are. But in a bid to sharply expand its presence in Arizona, Huntway is spending $10 million to build another refinery between Phoenix and Tucson.
Why there? At the moment, Arizona must import nearly all of its liquid asphalt because there are no refineries near the state’s major cities. But last year’s opening of the All-American Pipeline, which moves crude oil from California across the Southwest, made it feasible for Huntway to make liquid asphalt there.
Cost Advantage
And Huntway’s refinery will be the first to open next to the pipeline, presumably giving the company a big cost advantage over rivals who will still send their liquid asphalt into Arizona by truck or rail.
Huntway has many new investors waiting to see if the opportunity pays off. Huntway went public 2 weeks ago, raising $29.7 million for the company. The offering also enriched Forster, 52, and Huntway’s chief financial officer, Douglas C. Hansen, 39. Forster and Hansen each sold part of their ownership stakes in Huntway, receiving $1.4 million and $1.2 million, respectively. Each originally had about $200,000 invested in the company, which earned $2.3 million on revenue of $97 million last year.
Asphalt is as basic a product as it is black. Gooey liquid asphalt is among the products that Huntway gets from refining a barrel of crude oil. The company ships the liquid asphalt by truck or railroad tank car to mixing companies, which mix it with rock and gravel and sell the finished asphalt to road-building and roofing concerns.
Delivering liquid asphalt is a lot like delivering pizza: It’s only good if it arrives hot. Trucks can maintain the product’s heat, but if the truck goes more than about 350 miles, the cost makes the product uneconomical. Moving liquid asphalt by rail is cheaper, but that takes longer, and after the product comes off the train it must be reheated before it can be delivered.
In any case, Huntway would seem poised to benefit from the growing concern about the crumbling condition of the nation’s infrastructure--its highways, bridges and so forth. But there has been talk about the infrastructure problem for a decade. Even asphalt executives concede that funding for such projects, while constant, likely will not mushroom soon.
On June 7, for instance, California voters defeated by 550 votes an initiative to float a $1-billion bond to improve the state’s roads and highways.
“Unless there’s a significant infusion of new money, you’re not going to see a hell of a lot of increase in market demand” for asphalt, said Juan Whitehead, general manager for the asphalt division of Chevron Corp., which with Shell Oil are the dominant liquid-asphalt suppliers in Northern California. In Southern California and in Arizona, the biggest player is Edgington Oil Co. of Long Beach.
Huntway’s new Arizona plant, which will raise Huntway’s overall capacity by 50%, is scheduled to open in mid-1989. It should give Huntway a major cost advantage over Edgington, said James McDonald, an industry analyst in San Marino.
Liquid asphalt sells for about $16 a barrel in California, but transportation costs raise the price to $20 in Arizona, McDonald said.
But Edgington, with total sales of 4 times Huntway’s and with 60% of the Arizona market, promises to defend its turf.
“We’re not going to give that up easily,” vowed Archie H. Humphrey, president and chief executive of Edgington, which until recently was owned by Saudi businessman and arms dealer Adnan Khashoggi. “I am a very stiff competitor, and I’m not going to turn my head or roll over and play dead just because he’s building a refinery,” Humphrey said.
To fight back, Edgington also plans to build a refinery in Arizona near the pipeline. The company already has purchased land on which to build the plant, which would open 6 or 8 months after Huntway’s, Humphrey said.
Forster is not concerned. “They’ve been talking about it for at least 3 years and they’re still talking about it,” he said. Besides, he added, Huntway never proposed its plant “with the idea we’d be the only refinery over there.”
Huntway also sells diesel fuels and other oil-based products, although half of its 1987 revenue came from liquid asphalt and most of that was sold in California. The rest was sold in Arizona, Nevada, Oregon and Utah. Huntway’s existing two refineries are in Wilmington near Long Beach, which serves clients south of about Bakersfield, and in Benicia near San Francisco, which serves the north.
Together, the refineries have the capacity to refine 15,000 barrels of oil products per day, and 8,000 of that is dedicated to liquid asphalt, according to the American Petroleum Institute, a trade group. Total liquid-asphalt capacity in California is 76,850 barrels per day. Thus Huntway, with a 10% share of capacity, would be a medium-sized player among the state’s dozen competitors.
Forster is a fifth-generation Californian whose great-grandfather was married to the sister of Pio Pico, the last Mexican governor of California.
After getting a civil engineering degree from Cal State Los Angeles, the younger Forster briefly worked for local transportation agencies and then for some rock and asphalt suppliers. In 1964, he joined the old Douglas Oil Co., which later became part of Continental Oil, which in turn is now owned by Du Pont.
Forster spent 15 years at Douglas, rising to vice president of marketing. But in 1979, two Los Angeles brothers, Robert and Wally Hunt, who already own an asphalt-mixing company called Huntmix, formed a company called Huntway Refining to refine and sell liquid asphalt. They tapped Forster to be chief executive.
“I was ready to leave the big corporation,” Forster said, adding that he wanted “a piece of the action, a small piece of the ownership,” and Huntway “was exactly what I was looking for.”
In September, 1987, Forster led an investor group that bought Huntway from the Hunts for $88 million. Most of the financing was raised by a unit of First Chicago Corp., which also got majority ownership of Huntway.
Huntway is now organized as a master limited partnership, that is, a partnership with a widespread investor base. In its public offering, 4.88 million Huntway “preference units,” which are similar to shares of stock and which now trade on the New York Stock Exchange, were sold for $11.50 per unit. (Monday’s closing price was $12.375 per unit.)
Huntway also has common units, all of which are owned by management and other original investors. (Forster owns 4% of Huntway; Hansen about 3%.) But the preference units now held by the public get first call over the common units in receiving any cash distributions--which are similar to dividends except that they are not taxed first at the corporate level--that Huntway makes each quarter.
The size of those distributions will depend on Huntway’s performance. And while Forster is not predicting a huge spurt in demand, he is not pessimistic, either.
For one thing, environmental laws in California have grown so strict that it is unlikely another liquid-asphalt refinery will be built here, he said. And Huntway’s refineries, built in 1979 and 1982, were the last erected in the state, Forster said. All of which means no competitor will be adding capacity and diluting everyone else’s market share, he said.
In addition, government spending to refurbish highways in California and Arizona might not skyrocket in the next few years, but the deterioration of the roads--and thus the need to fix them--is not going to disappear, he said.
“We don’t see the demand getting any worse,” Forster said.
HUNTWAY PARTNERS AT A GLANCE--Huntway Partners in Valencia refines and sells liquid asphalt, principally for use in road paving, and othe refiend oil products. Huntway, whose predecessor companies date back to 1979, operatew two refineries in California--in Wilmington and Benicia-- and is building a third in Arizona
