Tesoro to Buy BP Refinery

In a bid to form the largest U.S. oil-refining realm in the Pacific Basin, Tesoro Corporation ( TSO - Analyst Report ) has agreed to acquire Carson refinery and associated business units from London-based BP plc ( BP - Analyst Report ) .

For the deal, Tesoro will shell out almost $2.5 billion, out of which $1.2 billion will be for the assets, while the rest will be for the value of inventory, estimated at the time of closing. The inventory is currently valued at about $1.3 billion as of the close of business on August 13, 2012.

Located in Southern California, the Carson refinery lies close to Tesoro’s Wilmington refinery and exhibits a conversion capacity of 266 million barrels per day (MBPD).

Apart from the refinery, the acquisition also includes 800 dealer operated retail stations spread across Southern California, Nevada and Arizona along with the well-established ARCO® brand and related registered trademarks. As a part of the deal, BP will also sell off the Watson cogeneration (cogen) facility and anode coke calcining facility.

Tesoro, the biggest oil refiner on the West Coast, will also take over an integrated logistics system that covers marine, land storage and product marketing terminals as well as a network of pipelines. The company plans to transfer these properties to its master limited partnership – Tesoro Logistics L.P. ( TLLP - Snapshot Report ) – through a number of transactions, enhancing the enterprise value of the latter.

Tesoro will fund the acquisition – which is expected to be completed by mid-2013 – from the proceeds received from the sale of the associated logistics assets to Tesoro Logistics L.P. Tesoro expects operations from the refineries to propel earnings by 24% in its first two years.

With this transaction, Tesoro will be able to increase its refining operations in California by twofold, thereby bridging the gap with the biggest refiner of the region – Chevron Corporation ( CVX - Analyst Report ) .

In addition to the Golden Eagle plant in Martinez and the Wilmington refinery, this is Tesoro’s third refining asset purchase in California, which has raised eyebrows of the regulators. The authorities are not in favor of concentrating the power of gasoline and diesel fuel production in the hands of a single company in a state.

For BP, this disposition is a part of its strategy to sell assets worth $38 billion by the end of 2013. This move underlines the company’s attempts to repay costs connected with the Macondo well blowout in the Gulf of Mexico.

Tesoro currently holds a Zacks #2 Rank, which implies a Buy rating for a period of one to three months, while BP retains a Zacks #3 Rank (short-term Hold rating).