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Arco owner
to switch operator
on Oahu

Current manager B.C. Oil has
struggled financially in the face
of rising gas prices

By Rob Perez
Star-Bulletin

The owner of more than 25 Arco gas stations on Oahu plans to bring in a new company to oversee its local operations, hoping to reverse the financial beating it has taken in this market.

U.S. Restaurant Properties Inc. says it has reached an agreement in principle with an as-yet-unidentified "credit quality" tenant to take over operations from B.C. Oil Ventures, which has struggled since assuming control last year.

B.C. Oil, an Orange County, Calif.- based company, has leased the former Texaco stations and an Oahu fuel storage terminal from U.S. Restaurant since the latter acquired the properties a year ago.

But the foray into the Hawaii market has not gone well for either company.

"It's cost them dearly," said Kit Case, an analyst with Southwest Securities Inc. in Dallas.

Dallas-based U.S. Restaurant, a real estate investment trust, last week said it has taken a $12 million charge against earnings in part because of its problems in Hawaii. It also disclosed in November that it had agreed to a temporary reduction in rents to B.C. Oil, which was having cash flow problems.

U.S. Restaurant said in November that it expected to get reduced revenue from the troubled operations possibly into the first quarter of this year.

B.C. Oil's problems stemmed largely from its fuel purchasing contract, which is pegged to the spot market price for gasoline in Los Angeles, according to analysts.

"When that price shot up, they weren't able to pass any of the increase on," Case said.

He said B.C. Oil was in default on a loan and leases it has with U.S. Restaurant.

Officials from both companies didn't return phone calls seeking comment.

But in its November financial report, U.S. Restaurant cited the volatile oil market as a trigger for the problems.

"A combination of an increase in world crude oil prices and massive price swings for refined products on the West Coast resulted in severely reduced operating and cash flow margins for the tenant," U.S. Restaurant said, not identifying B.C. Oil by name.

Analysts said the report clearly was referring to B.C. Oil because it used descriptions -- such as U.S. Restaurant's largest service-station tenant and the only one overseeing a wholesale terminal operation -- that only applied to the California company.

Since March 1999, when B.C. Oil started converting the Texaco stations to Arcos, oil prices have more than doubled and the spot market price for regular unleaded gasoline in Los Angeles has jumped nearly 90 percent.

But profit margins locally have narrowed considerably since the state in October 1998 filed a $2 billion antitrust lawsuit against Hawaii's major oil companies, according to analysts. The lawsuit accuses the companies of conspiring to keep wholesale prices artificially high -- a charge the defendants deny.

The added scrutiny from the lawsuit and today's economic pressures spell tough times for gas marketers in Hawaii, analysts say.

"When both of these factors are a force, you've got a real challenge," said Doug Christopher, an analyst with Crowell Weedon & Co. in Los Angeles.

Arco dealers yesterday said they have not been told what is happening with B.C. Oil or whether they soon could have a new landlord. "We just have to wait and see what happens," said Leroy Yamamoto, who runs two Arco stations.

U.S. Restaurant purchased 27 gas stations and the Oahu terminal from Equilon Enterprises LLC, a joint venture of Texaco Inc. and Shell Oil Co.

The Dallas trust paid $32 million for the assets and issued B.C. Oil $9 million in notes as part of the deal, analysts said.

Investors have not been enamored with U.S. Restaurant of late. Its stock has lost more than half its value since early last year and yesterday closed at a 52-week low of $11.37 before edging up 37-1/2 cents today to $11.75.