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Sunoco’s Buyout Could Boost Pump Prices

The deal accelerates a trend that could hit the East Coast especially hard

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With our energy logistics infrastructure ever evolving, a recent move by one growing player could signal the end of an era — an end that could lead to higher gasoline prices for the average consumer.

As Brent crude prices have skyrocketed over the last year, refiners on the East Coast have had one heck of time turning a profit. While refiners in the middle of the country have been able to feast on cheaper West Texas Intermediate (WTI) crude and profit from the spread, refineries on the East Coast haven’t been so lucky.

Almost all East Coast refineries are built to “crack” only light, “sweet” oil (i.e. Brent crude) and can’t handle the more “sour” WTI crude. With Brent pricing the global standard, it’s more directly tied to those nasty geopolitical events and growing demand than Midwestern WTI. And with saber-rattling ongoing in the Mideast and demand from various emerging markets still growing rapidly, analysts predict a new price floor for oil.

This increasingly difficult environment has already prompted companies such as Valero (NYSE:VLO) and Hess (NYSE:HES) to begin exiting the refining business on the East Coast altogether. Ultimately, consumers on the east side of the country could pay 5 to 10 cents more per gallon because of the costs of transporting refined gasoline from the Gulf or the Midwest.

The latest mega-acquisition could accelerate that development.

End of a 120-Year Era?

After nearly 120 years in the refining business, industry stalwart Sunoco (NYSE:SUN) has agreed to be bought out by pipeline company Energy Transfer Partners (NYSE:ETP). The $5.35 billion deal will give ETP access to Sunoco’s 7,900 miles of pipeline and storage terminals that stretch from Texas to New Jersey, as well as 32.4% stake in Sunoco Logistics Partners (NYSE:SXL).

That MLP subsidiary controls around 5,400 miles of crude-oil pipelines and 2,500 miles of refined-product pipelines. When the deal is done, Energy Transfer will get about 30% of its revenue from oil, refined products and other “heavier hydrocarbons.”

The blockbuster deal is the latest in a flurry of activity in a normally sleepy sector. The shale-field development binge and growing adoption of hydraulic fracturing has highlighted the need for more energy infrastructure across the U.S. There are bottlenecks all across the line.

To that end, a variety of logistics players are on the hunt to expand their capacity. So the deal certainly makes sense for Energy Transfer Partners. The company will continue in its transformation from  midsize regional  into a national carrier of petroleum products with more than 45,000 miles of pipelines.

The deal also makes sense for Sunoco. The Philadelphia-based company has been shifting its focus away from refining of crude toward energy logistics. Its pipeline and storage assets are a good fit with ETP’s overall system — and the 23% buyout premium doesn’t hurt, either.

So as a pipeline play, this acquisition is top-drawer. But what will happen to the East Coast refining business — and gasoline prices?

Article printed from InvestorPlace Media,

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