Marathon Traders Gain E.Coast foothold with Hess Deal

posted by Joseph Keefe May 22, 2014

Marathon Petroleum Corp is poised to expand its growing Midwest and Gulf Coast fuel trading operation to the East Coast with Thursday's deal to buy Hess Corp's retail network and transport contracts.

The purchase will give Marathon control of Hess's gasoline stations and access to pipelines, including the capacity to ship approximately 40,000 barrels per day on the sought-after Colonial Pipeline from the Gulf Coast to the East Coast, according to the companies. The $2.9 billion deal is expected to close late in the third quarter.

Chief Executive Officer Gary Heminger said the deal will "further leverage" the company's refining and logistics assets, "providing an outlet for an incremental 200,000 (barrels per day) of assured sales from our refining system."

That likely means opening up new trading opportunities. Marathon's nearest refinery is nearly 500 miles east of New York City in Canton, Ohio, with few major pipelines in between. Shipping fuel north from its Texas and Louisiana plants should offer new opportunities for enterprising traders.

"Marathon is not seen as a big, active, trader, so it will be interesting to see if that changes," said Robert Campbell, a New York-based analyst at consulting company, Energy Aspects.

The purchase would allow Marathon to complement its diesel export business, bringing gasoline into New York Harbor as it sends distillate to Europe, he said.

Marathon has shipped about 3.3 million barrels of distillate fuels out of the country in the past 12 months, sending shipments to destinations including Mexico, Panama, El Salvador, the Netherlands, and the Philippines, according to data compiled by Reuters. Marathon's exports trail those of integrated global oil companies like Shell and BP, and merchant traders like Vitol and Trafigura.

"Marathon will probably look at bringing blended product from the Bahamas into Florida and also move product out of the Midwest into Pennsylvania and PADD 1," Campbell said.

A massive oil storage facility in the Bahamas may offer the chance for traders to use lower-cost ships to transport fuels to the East Coast from the Gulf Coast, where Marathon operates two major refineries. Shippers may use lower-cost foreign ships to transport oil through the Bahamas, bypassing regulations that require special ships for use between U.S. ports.

The deal will not include the nearly 40 million barrels worth of petroleum product storage terminals up and down the Eastern seaboard that Hess sold last year to Buckeye Partners LP for $850 million.

It is not clear how the lack of company-owned storage terminals may affect Marathon's trading plans, although many owners - including Buckeye - typically lease out their tanks since they don't own their own retail outlets.

Marathon didn't immediately respond to requests for comment.

EAST COAST OPPORTUNITIES

The purchase of Hess's network will unite the fourth and fifth largest U.S. gasoline retailers, making it the largest company-owned and -operated chain in the nation by revenue.

With a major position on the East Coast, Marathon could also become an important player in the New York Harbor market, where benchmark U.S. gasoline and diesel prices are set.

Marathon doesn't trade "much" now, but that's likely to pick up when they take over retail outlets, said an East Coast-based products broker.

Hess has long been a major importer of gasoline and other fuels into the East Coast until a year ago, when it scaled back by about 75 percent on a monthly basis, according to data from the Energy Information Administration.

In 2012 it imported 19.8 million barrels of products to the region; by contrast Marathon imported just 84,000 barrels.

But Marathon has become a growing force in both Midwest and Gulf Coast markets since spinning off from oil producer Marathon Oil Corp in 2011. Marathon purchased the 475,000-barrel-a-day Texas City refinery from BP Plc in 2012, along with four marketing terminals and contracts to supply 1,200 retail sites in the U.S. Southeast.

This year Marathon increased its stake in the 1,830-mile Explorer Pipeline to 25 percent. Explorer transports diesel, fuel oil and jet fuel from the Gulf Coast to the Midwest.

It also boasts 64 company-owned and -operated light product terminals, two part-owned and non-operated and 60 third-party light product terminals across the Midwest and Southeast, plus 200 owned or leased barges that mainly transit the Ohio River, according to its website. It also owns 170 transport trucks and 2,165 owned or leased railcars. Last year it also sold 74,000 bpd of ethanol blended into gasoline, it says.