Sale of BHP
refinery may fetch
$250 million

The Australian-based owner
is in talks to sell the 95,000-barrel-
a-day refinery

By Rick Daysog
Star-Bulletin

The parent of BHP Hawaii Inc. is selling the state's largest petroleum refinery, in a deal some analysts said could fetch as much as $250 million.

Broken Hill Proprietary Co., Australia's largest natural resources company, is negotiating the sale of the 95,000-barrel-a-day refinery, which it acquired in its $380 million buyout of Pacific Resources Inc. in 1989, according to BHP spokesman Nathan Hokama.

The company declined to disclose the identity of the prospective buyer or the proposed sale price.

State officials plan to watch the pending deal closely, given its potential impact on Hawaii consumers and the local economy.

"Clearly there is a compelling state interest," said Maurice Kaya, energy programs administrator for the state Department of Business, Economic Development and Tourism.

The 25-year-old refinery, at Campbell Industrial Park, employs about 230 workers. Chevron Corp. operates the state's only other refinery, a 55,000-barrel-a-day refinery nearby.

In reviewing its operations, Broken Hill for the past year has hinted at a sale of its profitable local plant, the huge corporation's only petroleum refinery. The company in July valued the refinery at about $370 million.

Analysts believe the refinery will sell at a discount, saying it has performed below management's expectations.

"I think BHP would be pleased to get it off their hands even if it was at a discount," said Graeme Newing, resources analyst for County Natwest Securities in Sydney. "The refinery hasn't been a big success for the company."

BHP last month completed the $100 million sale of its Gasco Inc. synthetic natural gas subsidiary to Stamford, Conn.-based Citizens Utilities Co.

BHP's other major asset in Hawaii -- the 32 BHP Gas Express retail gasoline outlets -- is not affected by the sale of the refinery. BHP Gas Express employs about 300 workers on Oahu, Maui and the Big Island, Hokama said.

Newing and other analysts believe that the refinery could sell for as much as $250 million, although one petroleum analyst who declined to be identified believes it could sell for less than half that amount.

Historically, Hawaii's refineries haven't been as profitable as their mainland competitors. Peter Hickson, resources analyst for SBC Warburg Dillon Read in Sydney, said the BHP Hawaii refinery has generated only a 5 percent return on assets during the past year.

Hickson noted that Broken Hill had targeted a 10 percent to 15 percent rate of return for its various operations.

But operations are improving. With the rebound in the mainland petroleum refining business, BHP Hawaii's refinery has been on the upswing, said Fereidun Fesharaki, petroleum analyst and director of energy programs at the East-West Center.

And Hickson said that during the three months ended Dec. 18, BHP's Hawaii refinery generated a rate of return of about 11.5 percent on an annualized basis.

"This is a good time to sell," said Fesharaki.

"This year has been a spectacular year for U.S. refiners."

A proposed sale could face the scrutiny of state authorities. State Attorney General Margery Bronster, whose office reviews potential anti-trust concerns, declined comment on the specifics of the proposed transaction. But she noted that any deal that reduces competition or hurts consumers could come under her office's review.

DBEDT's Kaya noted that the BHP refinery plays an important role in Hawaii's economy. A disruption in the petroleum supply not only would hurt local motorists but also could affect the tourism industry since the refinery produces the bulk of jet fuel for flights to and from Hawaii.

On the flip side, Kaya said the deal could benefit consumers if the buyer were committed to serving the state's long-term needs.