ETP has already made it clear that it doesn’t want Sunoco’s retail business, which operates around 4,900 gas stations across the U.S. CEO Kelcy Warren has said that both the retail and the refining operations are “not core” and will be sold or spun off as another MLP to unit holders.
Before the ETP buyout was announced, Sunoco had been in talks with private-equity firm Carlyle Group to create a joint venture to run its 335,000-barrel-per-day Philadelphia refinery. The ETP buyout certainly could put a wrench in Sunoco’s plans.
Under the joint venture being considered, Sunoco would put up the refinery assets in exchange for a non-operating minority interest in the venture. However, Energy Transfer Partners may not even want a minority interest in assets that don’t fit within its pipeline-focused business model. While Sunoco has pledged to keep the refinery open until August, a full closure is still a real possibility. That closure would crimp gasoline supplies.
Sunoco is still looking into alternative uses for its idled plant in Marcus Hook, Del. One possibility includes using it to process or store natural gas. Either solution could make sense — especially the storage option — since ETP has plenty of experience in this area. But neither will help the pending gasoline price/supply crunch.
And the Sunoco-ETP merger isn’t the only refining deal that could boost gasoline prices on the East Coast.
In an effort to bring some jet-fuel production in house, Delta Air Lines (NYSE:DAL) has agreed to purchase a refinery in suburban Philadelphia from Conoco (NYSE:COP) spin-off Phillips 66 (NYSE:PSX). The plant had been idled for months, and without a buyer, it would have been closed by the end of May.
Delta is planning to spend around $100 million to convert the refinery to maximize production of jet fuel. While that will certainly help Delta’s fuel bill — assuming the airline can run it better than ConocoPhillips did — the rest of us are out of luck. A switch to more jet-fuel production means less gasoline for drivers.
Price Jump at the Pump Looming
Sunoco’s two refineries, along with the Trainer facility owned by ConocoPhillips, are responsible for about half of all the jet fuel, gasoline and diesel produced on the East Coast. Needless to say, any changes to this production or continued closure plans will put a crunch on gasoline supplies. Oppenheimer Funds analyst Fadel Gheit perhaps said it best: “The golden age of East Coast refineries is over.”
While gasoline demand has been dropping in the face of already rising prices, the market still hasn’t taken into account the potential of full closures of these plants on the price of a gallon of gas. Refiners on the Gulf Ccoast will need to pick up the slack, resulting in longer supply chains.
According to the U.S. Energy Information Administration, gasoline would have to be trucked and shipped via train to make up for the lost supply. That will tack on at least 5 to 10 cents a gallon. Additionally, many of the newer pipeline plans are about moving crude oil downward from the Cushing storage depot to the more state-of-the-art refineries in the Gulf. That leaves the Northeast high and dry.
Ultimately, most of us will be paying more at the pump over the next few years anyway, even with some of the new pipeline construction that’s under way. Sunoco’s sale, along with Delta’s jet-fuel play, highlight how difficult and desperate the refining industry is getting.
For investors, it’s best to stay away from refiners and continue to focus on opportunities in the midstream sector — new infrastructure and pipelines is where the action will be.