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Masterpiece Refining – From PBF Energy

PBF Energy Inc is a private company that bought three US refineries with 0.5 MMb/d capacity in the past two years and now plans to go public. Two of the refineries are on the East Coast where many larger players have abandoned the refining business. The third is in the Midwest sweet spot. Today we look at how the company plans to keep these refineries profitable for investors.

Before we start – a quick disclaimer. RBN Energy does not advocate investment in IPOs, or any security, for that matter. We are not an investment advisor.  The purpose of this article is not investment advice or an endorsement.

Last Monday (December 3, 2012) PBF Energy Inc filed papers with the SEC pursuant to an IPO listing on the NYSE. The company owns three refineries in Delaware, New Jersey and Toledo, Ohio with combined capacity noted above of 0.5 MMb/d (about 3 percent of the US total). Two private equity companies - the Blackstone Group and First Reserve Corporation - currently own a majority interest in PBF and they will use the IPO to exit their investment. Under the IPO filing process, the SEC requires PBF to submit an S-1A registration statement and prospectus. These documents detail refinery commercial operations to identify risks that potential investors should be aware of. The good news for analysts is that the prospectus provides a peak into details of the refinery operation that would not normally see the light of day.

We felt the opportunity afforded by PBF’s prospectus was too good to miss and so we took advantage of the data to delve a little deeper into how these refineries expect to make money in today’s market and how they are reacting to the changes in US crude oil supplies that we have been documenting here over the past year. You can read a copy of the complete prospectus here.

PBF is currently owned by private equity and if the IPO is successful it will become a publicly traded company that just owns refineries. Running refineries as a standalone business has inherent risk because the profitability of their operation depends on the refinery margin or crack spread (read more about margins in Refinery Yields Forever). That boils down to the spread between crude prices and refined product prices. Trouble is the crude and refined product markets can often be at odds with one another. You can purchase crude at the going market price and then find the market price for the products your refinery produces has fallen below the cost of crude – meaning you lose money on every barrel. Larger multinational oil companies can offset some of these risks by owning oil in the ground and by selling refined products through their own distribution network. If you just own the refinery, you need to purchase every barrel of crude and sell every gallon of product at market prices.  So far PBF has succeeded in keeping its refineries profitable.

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