Market Overview

Tesoro Surges on Purchase of BP Refinery

Shares of Tesoro (NYSE: TSO), one of the largest U.S. refiners, are soaring by over nine percent on volume that is better than double the daily average after the company announced it purchase BP's (NYSE: BP) Carson, California refinery and related assets for nearly $2.5 billion.

Tesoro will pay $1.18 billion for BP's downstream assets in Southern California plus the value of the refinery's inventory, which is about $1.3 billion. The Carson facility has capacity of 266,000 barrels per day and is near a Tesoro facility in Wilmington, California. Tesoro's Wilmington refinery has capacity of 97,000 barrels per day, according to Reuters.

The deal increases Tesoro's exposure in the ultra-competitive California market. Already the largest refiner on the West Coast, Tesoro will gain a third refining plant in the state through the purchase from BP. Cost savings could prove to be a critical part of the deal for Tesoro because refiners operating in California face more costs than they do in many other states. California regulations stipulate gasoline processed in the state must meet higher environmental standards than in many other states; one reason the state has some of the highest gas prices in the country.

Tesoro said it can save $250 million a year by combining the Carson and Wilmington operations. The deal, which is expected to close in the middle of next year, also includes 800 gas stations and ownership of the Arco brand.

Shares of Tesoro Logistics (NYSE: TLLP), a master limited partnership controlled by Tesoro, traded higher by almost five percent on volume that is already 50 percent above the daily average on news of the deal. Tesoro will sell pipeline assets and three marine terminals, four land storage terminals and four product marketing terminals associated with the BP deal to Tesoro Logistics.

BP also said it is selling two processing plants in Texas to Eagle Rock Energy Partners for almost $228 million. Europe's second-largest oil company said last year it was looking to sell some downstream assets as part of its asset sales program aimed at raising cash following the 2010 Gulf of Mexico oil spill. The British oil giant aims to sell $38 billion in assets by the end of 2013. The deal with Tesoro brings the figure to $26.5 billion, Bloomberg reported.

Some analysts previously said BP should follow Marathon Oil (NYSE: MRO) and ConocoPhillips (NYSE: COP) in spinning off refining operations into separately publicly traded entities in an effort to unlock shareholder value.

Texas-based Tesoro hit a new 52-week high on news of the deal. The stock is still about 50 percent above its all-time set in 2007.

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