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SAN ANTONIO -- Tesoro Corp. approved agreements to purchase nearly 400 retail sites from Shell and USA Petroleum, located primarily in California and other Western states.
The agreement with USA Petroleum will add 140 retail locations to Tesoro's portfolio. Of the 140 retail sites, 125 fly the USA brand and 15 are other major brands; 132 operate in California, six are based in the Washington and two are located in New Mexico. Of those in California, 73 are located in Northern California and 59 are based in Southern California. The sites boast an average of 185,000 gallons per month and include underlying real estate.
In addition, the agreement will add a product terminal located in New Mexico. The purchase price for the transaction was $277 million, in addition to the value of inventory at closing, which is estimated to be in the $10 to $15 million range.
"Many of these are Beacon sites we sold to USA at one time," Bruce Smith, chairman, president and CEO of Tesoro, said in a conference call to investors. "Most of the other sites are in Southern California and fit nicely with our new refining footprint."
Smith added that the USA sites would continue to be operated as USA branded sites that fit its strategy of using retail locations to maximize the production of clean fuel. "I believe the investment in USA ensures there is a strong independent brand in California," he said.
The acquisition provides Tesoro with retail locations near its California refineries that allow it to run the refineries at full capacity, invest in refinery improvements and deliver more clean products to the market, Smith said in a written statement. "As an independent refiner and marketer, our strategy is to meet the product demand of a diverse customer base, including other independent retailers while also working to increase the amount of clean products available in the market."
Tesoro also completed agreements to purchase approximately 250 retail sites in Southern California from Shell Oil Products US. The Shell-branded sites -- which Smith described as "some of the best sites in southern California" -- will continue to fly the Shell banner under the long-term agreements. The locations average 225,000 gallons per month of California-grade gasoline from Shell's Los Angeles refinery. The acquisition includes underlying real estate at many of the locations.
In addition to the retail sites, Tesoro acquired its Los Angeles refinery and Shell's Wilmington Products Terminal. The purchase price for the transaction is $1.63 billion, plus the value of petroleum inventory at the time of closing, which is estimated to be $180 to $200 million.
"These acquisitions are the result of a very thoughtful and deliberate strategy and review process that has been going on for the past few years," said Smith in a conference call to investors. "The Shell retail sites play an important role to our future in California. Our strategy is to have retail assets in locations that enable us to produce the maximum amount of clean fuel for our system."
The 100,000 barrel per day Los Angeles refinery is located in Wilmington, Calif., south of Los Angeles. The heavy, sour crude refinery produces clean fuels to meet California's fuel requirements. Tesoro will integrate the refinery with its network of shipping logistics capabilities already running on its Golden Eagle refinery. The company will make improvements at the refinery to enhance reliability and environmental performance and increase production of clean products over the next seven years, to be completed in 2011.
"This sale represents good value for our shareholders and because Tesoro is acquiring all assets as a going concern, it also secures jobs and energy supplies for people in Southern California," said Rob Routs, Royal Dutch Shell executive director downstream. "The deal we have negotiated comes as a result of a proactive approach from Tesoro to which we have reacted positively as it aligns with our ongoing strategy of managing our Downstream portfolio."
"These transactions are a win-win for shareholders, wholesale, retail customers, the state of California and the communities where our new employees live," said Smith.
The transaction will be financed through cash on-hand, which totaled approximately $1 billion. Lehman Brothers served as Tesoro's financial advisor for the transaction. Both transactions require regulatory approval and are expected to be completed in the second quarter of 2007.