Tosco Plans to Buy Unocal’s Refining, Retail Operations
Tosco Corp., formerly a small-time California oil company that nobody wanted but which has since wowed Wall Street by buying money-losing refineries and squeezing profit from them, agreed Monday to buy Unocal Corp.’s refining and marketing operations for more than $1.8 billion.
If completed, the deal will instantly make Tosco a big-time player in California and nationally. It would become the state’s second-largest refiner, after Chevron, and the third-largest retailer of gasoline, after Arco and Chevron. And the Unocal purchase would make Tosco the nation’s largest independent refiner, with a capacity of close to 1 million barrels a day.
Investors heartily approved of the deal. Shares of Stamford, Conn.-based Tosco shares soared about 20%, or $12.375, to close at $72.50 on the New York Stock Exchange on Monday; Unocal rose $1 to $40.50. The share price of Tosco has doubled this year.
Included in the purchase of Unocal’s 76 Products Co., headquartered in Orange County, are refineries in San Francisco, Santa Maria and Los Angeles, more than 1,100 gas stations and the familiar 76 brand name.
El Segundo-based Unocal announced last month its intention to spin off “downstream” operations in California and concentrate on petroleum development in the Far East. It is expected to use proceeds of the Tosco sale on such overseas exploration and development.
Tosco has capitalized on the declining appeal of petroleum refining by buying up refineries at a fraction of their construction cost and making them profitable. Increasingly, large oil companies have fled the refining business, discouraged by gasoline’s strict and costly environmental rules and its low-growth, low-margin economics.
Tosco already owns refineries in Martinez, Calif.; Washington state; New Jersey; and near Philadelphia. The company is also expanding its retail network. Earlier this year, it acquired the 2,500-outlet Circle K convenience store chain for $900 million, a deal that gave it 7% of California gasoline retail sales.
That will mean reinvigorated competition for Arco and Chevron, said Fadel Gheit, senior energy analyst with Fahnestock & Co. in New York, who predicted a “three-way battle” will ensue. “Unocal exited because it didn’t have the stamina to fight.” The proposed nationwide merger of Texaco’s and Shell’s refining operations promises to create another powerhouse to rival the others in the number of California service stations.
The addition of Unocal’s 1,100 stations to the 286 Circle Ks it already operates in California will thus raise Tosco’s statewide market share to 17% in gasoline retail sales. Top-ranked Arco and Chevron both have market shares of more than 20% statewide.
Formerly an obscure oil shale refiner based in Santa Monica, Tosco moved to Connecticut in 1990. Weighed down by losses, the company put itself up for sale in the late 1980s but found no takers.
But under Chief Executive Thomas D. O’Malley, the company has prospered and become a Wall Street star, earning twice the profit of other oil refiners, said John Hervey, an oil analyst at Donaldson Lufkin & Jenrette.
Tosco has become well known for extracting major concessions from labor unions at its newly acquired refineries, maximizing “throughput,” or refining volume, and cutting staffing to the bone.
For that reason, analysts warned Unocal refinery workers and the 850 employees in 76 Products’ headquarters in Costa Mesa to brace for possible layoffs.
For the nine months ended Sept. 30, Tosco reported a profit of $116 million on revenue of $7.2 billion. Unocal, which said it will book a loss of $375 million on the sale, declined to comment on the fate of its employees.
Tosco plans to retain the 76 brand name and incorporate it into the Circle K locations where gasoline is sold, company executives said. Likewise, the Circle K brand will be transferred to some of the Unocal stations that have convenience store functions.
