Caltex considers possible purchases as oil companies exit refining and retailing

“We are keeping our eyes open,” Caltex’s Chief Executive Officer Julian Segal said in an interview in Sydney. “In Europe, there are Shell refineries for sale. Of course, you’re seeing Mobil selling their business here, Shell in New Zealand.” Segal didn’t identify any specific targets.

Australia’s largest refiner has slumped 32 percent in Sydney in the past six months as a stronger Australian dollar and a higher oil price hurt profits from converting crude into fuels. Refining margins across the industry declined after the worst global downturn since the Great Depression curbed demand, prompting Shell, Exxon Mobil and others to shut or sell plants.

Since joining Caltex in July, Segal, 54, has said the refiner may diversify into areas such as biofuels and liquefied natural gas, seeking to shield it from volatility in raw material prices and currency fluctuations.

“It would be interesting if Julian is talking about growing Caltex as a refining business,” said Andrew Williams, an analyst at Credit Suisse in Melbourne. “If there are distressed assets out there, it may make sense, though within the Australian context, the growth options are limited.”

Shell, Europe’s largest oil company, has 15 percent of its refining capacity, or 600,000 barrels a day, under review for possible sale. Idemitsu Kosan Co., Japan’s second-largest refiner, said it may close some refineries and cut capacity because of a global oversupply of oil products.

Reduced Competition

Regulators this month blocked Caltex’s proposed A$300 million ($267 million) purchase of 302 Mobil filling stations, citing concern the transaction would reduce competition. Caltex expects the Australian Competition and Consumer Commission to give details next month explaining why it opposed the transaction, Segal said. The refiner then will decide how to proceed, he said.

Caltex, half-owned by San Ramon, California-based Chevron Corp., had estimated it would have 22 percent of Australia’s branded fuel market after the purchase of the Exxon outlets, up from 16 percent.

Caltex operates two refineries, in Brisbane and Sydney. Forecasting a weak first half of 2010, Caltex said Dec. 9 it will shut down the lubricant unit at its Kurnell plant in Sydney and embark on a three-year plan to cut costs and make the business more efficient.

‘Bad News’

New refineries in China, India and Vietnam have increased output, adding pressure on refiners such as Caltex, Segal said.

“There is no shortage of bad news” for Caltex, Stuart Baker, an analyst at Morgan Stanley in Melbourne, wrote in a report, citing weak refining margins and the competition regulator’s decision to block the Exxon deal.

Refining margins, the difference between the cost of crude oil and the price of refined products, have dropped to an average of about $2.60 a barrel in the second half of 2009 from an average of $9.00 a barrel in the first six months. Even so, demand in the refining industry may be picking up and additional supply is being cut back through plant closures, Baker said. “We may not be far off a bottom.”

Acquiring refining assets in the current market to take advantage of cheaper prices may make sense, said Credit Suisse’s Williams. “It’s not a bad move.”

‘Mindful of Opportunities’

Reliance Industries Ltd., owner of the world’s largest oil-refining complex and India’s most valuable company, made an offer last month to buy a controlling stake in LyondellBasell Industries AF, the bankrupt chemicals and fuels maker. The purchase would include LyondellBasell’s Houston refinery.

Caltex isn’t in talks to buy a specific “downstream” refining, distribution or marketing business, Segal said. The company is focused on boosting its diesel sales to meet an expected increase in demand from the mining industry and increasing investment in biofuel distribution. At the same time, Caltex is searching for potential acquisition targets, he said.

“There is a restructuring in the downstream industry globally, and you see the majors pulling out,” he added. “We’re mindful of the opportunities in that area.”