Analyst Comments on Interest in Citgo Petroleum (VLO) (MPC) (HFC)

On Tuesday Reuters reported Venezuela's U.S. oil refining unit Citgo Petroleum received bids from four companies, including Marathon Petroleum (NYSE: MPC), Valero Energy (NYSE: VLO), HollyFrontier (NYSE: HFC), and consortium of TPG Capital and Riverstone. In the view of analyst Neil Mehta of Goldman Sachs, CITGO is of strategic interest to the refiners.

"While we do not take a view on the likelihood of a transaction, consistent with comments from companies on recent earnings calls, we believe there are three key strategic drivers of interest in the CITGO assets for a refiner. First, the benefit of increased midstream/logistics assets, which could be dropped down into MLP segments. Second, geographic diversification, as it could allow Mid-Continent refiners to have greater access to the Gulf Coast. Third, the potential to turn around and drive synergies from assets, which according to some management teams, have been underinvested in by the Venezuelan government. The success of the recent Carson refinery acquisition for TSO may have highlighted potential upside from refining M&A," said Mehta.

Commenting on Valero Energy, Mehta said, "Any potential acquisition would likely be compared with the opportunity cost of repurchasing shares. Many investors we have spoken to expect VLO will be more aggressive with return of capital in 2015 versus history."

On Marathon Petroleum, he said, "After the Speedway acquisition, MPC would need to demonstrate how its strong leverage levels can be maintained with another major transaction. Also, increased Gulf Coast exposure could be a risk, in the eyes of some investors, given the recent tightening of Brent-LLS spreads."

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