BAKKEN OIL BUSINESS JOURNAL

BakkenJournal_Dec15-Jan16

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Read online @ B A K K E N O I L B I Z . C O M / d i g i t a l - j o u r n a l 13 O'Malley continued, "Well, look, with regard to retail, I would certainly tell you there's a difference between northern California and southern California. In North- ern California, yes, it's a little bit harder to operate up there without retail…" "…We will be entering into a rather substantial agree- ment with the Exxon Corporation on various products coming out of Torrance, so I don't see any special dif- ficulty…With regard to operating in California, both Tom Nimbley and I and many other people within our organization have a lot of experience out there. It is a complex marketplace to operate in. I would hate to be doing this if we didn't know from our previous jobs how we need to evaluate things, but we're, frankly, very comfortable." WHAT IS PBF GETTING INTO? The refinery is located in the Los Angeles Basin, the highest gasoline demand region in the country. The facility accounts for approximately 7% of California's total refining capacity and approximately 14% of the LA Basin's total refining ca- pacity. Due to strict blending requirements in California, the LA Basin market is served by a limited number of suppliers. The refinery has a Nelson Complexity Index of 14.9, which means it is one of the most complex refineries in the coun- try. The Nelson Index measures the characteristics of a refinery in two ways: 1) its ability to convert crude into high-value products; 2) its ability to refine heavy crudes. The higher the Nelson number, the heavier the crude it can pro- cess. It processes heavy, high sulfur, high total acid number (TAN) crude oils into high-value products, of which about 70 percent is gasoline. At 14.9, the refinery is way up at the top of the chart, which gives the facility the potential to op- erate more profitably than others with lower index numbers, and that profit potential is the essence of its appeal to PBF. Regarding the Nelson Index , CEO Nimbley said, "Obviously it's got a 14.9 Nelson complexity index. It is a powerful, powerful machine. That is an advantage. Its crude process- ing, I mean, it runs a 16-degree API crude, which gives it an advantage versus the rest of the competition out there. There are a lot of machines out there that can run and chew up heavy crude, but frankly, the coking capacity that exists and the hydro-treating capacity that exists in Torrance is very strong." Nevertheless, there have been concerns about the recent performance of the facility. But in recent SEC filings management stated that operations will be on the right track by the second quarter of 2016, in time to conclude the transaction. One criticism: it has been suggested that Exxon may have to re-certify the Fluid Catalytic Cracking (FCC) and alkylation units because they have been out of service for over a year. Exxon Mobil was fined $566,600 after a large blast at the refinery on February18th, 2015 injured four workers. The California Division of Occupational Safety and Health, or Cal/OSHA, issued 19 citations for workplace safety and health violations. Investigators concluded the blast was the result of a hydro- carbon release from the fluid catalytic cracker unit into the electrostatic precipitator – a filtration device that removes fine particulates. The hydrocarbon release caused the electrostatic precipitator to explode. According to Cal/OSHA, its investigation led to the determina- tion that the fluid catalytic cracker unit had not been working properly for nine years, preventing Exxon Mobil from accurately monitoring hydrocarbon pressure buildup in the unit. Management addressed those concerns, stating, "We believe the Torrance refinery's historical operating performance and reliabil- ity is not indicative of the results that can be expected under our ownership of the assets…We believe the Torrance Acquisi- tion will be accretive to our earnings per share and will generate positive cash flow from operations." Also, "ExxonMobil has invested approximately $400 million in the Torrance refinery over the last year completing major turn- arounds on the FCC, alkylation plant and related units at the refinery. ExxonMobil will also be completing repairs to the elec- trostatic precipitator at the refinery prior to the closing of the Torrance Acquisition. We will be taking over a well-invested in, fully-functioning asset." Another indicator of confidence in the project and in manage- ment was delivered November 17th when PBF Energy announced that it had completed a bond offering of $500 million at an in- terest rate of 7 percent. The senior secured notes will mature in 2023. The closing of the offering is subject to the usual condi- tions. Analysts assessing bond investments such as this one are not easily misled. The success of the offering expresses their belief the refinery will deliver according to projections, which include a substantial operating profit beginning in 2017. Man- agement said it will use the net proceeds for general corporate purposes, including covering a portion of the purchase price of the Torrance refinery. Therefore, though serious obstacles to the completion of this transaction exist, at this point it looks as though the deal will close. Then the next phase will begin. Can PBF succeed in the tough market it has chosen for itself? That question will take more time to answer. THE TORRANCE REFINERY

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