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Revived Sunoco refinery could be worth $1 billion plus

Three years after a brush with extinction, the former Sunoco refinery in South Philadelphia has increased dramatically in value under new owners and could be worth more than $1 billion.

The refinery is at the heart of an upcoming IPO. (MICHAEL BRYANT/File Photograph)
The refinery is at the heart of an upcoming IPO. (MICHAEL BRYANT/File Photograph)Read more

Three years after a brush with extinction, the former Sunoco refinery in South Philadelphia has increased dramatically in value under new owners and could be worth more than $1 billion.

The private-equity firm Carlyle Group, which rescued the refinery in 2012 in a joint venture with Sunoco, on Thursday is launching an initial public offering of Philadelphia Energy Solutions Inc. on the New York Stock Exchange. The $250 million IPO would value the underlying refinery enterprise at $1.3 billion, if PES shares launch at $16.50.

Carlyle, along with Sunoco's parent company, Energy Transfer Partners, will remain firmly in control of the company.

The stock offering, which would generate money for PES's sponsors, represents a dramatic turnaround for the 335,000-barrel-a-day refinery complex, which Sunoco threatened to close in 2012 as part of companywide fire sale.

The Philadelphia refinery's transformation is largely due to the domestic shale-oil boom, which has produced the type of light, sweet crude oil that the 335,000-barrel-a-day Philadelphia complex is designed to process. In two years, PES has largely switched from more imports to domestic crude brought in by rail.

PES says it has invested $516.3 million to upgrade and maintain the Philadelphia refining complex, including $185.9 million to build the North Yard rail terminal, which can handle up to 280,000 barrels of crude a day, or four 100-car oil trains. The investments include $25 million of state grants, primarily to subsidize the rail unloading facility.

"This crude-by-rail infrastructure, including the North Yard terminal, has provided us with access to domestic feedstocks that have been price advantaged relative to foreign crude oil and has improved our competitive position," the company said in its prospectus, filed with the U.S. Securities and Exchange Commission.

PES says it now consumes 13.9 percent of the oil produced from the Bakken formation, centered in North Dakota. The company said its share of the domestic crude market could grow even more as long as domestic crude is cheaper than imported oil, primarily from Africa.

The Philadelphia complex also benefited from the closure of competitive refineries, including Sunoco's former operations in Marcus Hook and in West Deptford.

While energy stocks generally are depressed because of low oil prices, refiners are making a killing in a climate where their principal raw material is abundant and cheap.

According to its regulatory filing, PES earned $143.6 million in net income in 2014 on $13.3 billion in sales. The company estimates that second quarter net income this year will be between $140 million and $150 million, about three times higher than a year ago.

The company is selling 15.2 million shares and the underwriters have an option to buy up to 2.3 million more. Bank of America's Merrill Lynch and Credit Suisse are lead managers for the offering.

The company's stock will be listed under the symbol PESC.

The IPO would value Philadelphia Energy Solutions Inc. at about $488 million. Since the public holding company will own less than 40 percent of the refinery complex - the rest remains in the hands of the sponsors - the total enterprise would be valued at nearly $1.3 billion.

PES was formed in 2012, after political leaders urged Carlyle and Sunoco to salvage the refinery. The United Steelworkers union, which represents refinery workers, played a big role in bringing the parties together. Carlyle controls two-thirds of the venture.

The company's chief executive officer, Philip L. Rinaldi, who is also an investor in the company, last year received $2.2 million in total compensation, according to the company's filing. After the company goes public, Rinaldi's salary would increase from $750,000 to $900,000. He also is eligible for a cash bonus up to 180 percent of his salary and an additional deferred cash bonus.

Rinaldi will chair the 11-member PES board, whose membership will also include four Carlyle representatives, two from Sunoco parent ETP, and four independent directors.

Rinaldi has been leading an effort to build more pipelines to the Marcellus Shale natural gas fields in Western and northern Pennsylvania. The company's SEC filing notes that a "significant" portion of the complex is available for industrial development largely dependent upon more access to shale gas.

The 1,300-acre site in South Philadelphia is operated as two separate refineries, the Girard Point facility, founded by Gulf Oil, and the smaller Point Breeze facility, founded by Atlantic Petroleum. PES says the site is the oldest continuously operating petroleum facility in the world, dating to the Point Breeze refinery's founding in 1866.