Calumet Specialty Products sells off money-losing refinery

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Struggling Indianapolis-based oil company Calumet Specialty Products Partners announced Tuesday that it has sold off its interest in a joint-venture refinery that has been losing millions of dollars since becoming operational a year ago.

Calumet and WBI Energy, a subsidiary of North Dakota-based MDU Resources Group, had been equal partners in Dakota Prairie Refining, which developed and operated the $430 million refinery in Dickinson, North Dakota. The two companies formed a partnership to build the refinery in 2013, and the facility began selling diesel fuel in May 2015.

But now, Calumet and MDU have exited that partnership. Calumet said it sold off its interest in Dakota Prairie to WBI Energy, effective June 27. WBI then sold Dakota Prairie to San Antonio-based Tesoro Corp. for an undisclosed price.

In a news release issued Tuesday, Calumet said it will receive $28.5 million cash from the sale. Also, as part of the deal, MDU assumed about $66 million of debt related to Dakota Prairie, freeing Calumet from that obligation.

In a written statement, Calumet CEO Tim Go said the sale should have a positive impact on Calumet’s full-year adjusted earnings, “while bolstering our overall liquidity.”

The Dakota Prairie sale was Calumet’s first significant divesture in its 25-year history, the company said.

MDU Resources said it will suffer an after-tax impairment loss in the range of $150 million to $160 million due to the Dakota Prairie sale.

The refinery was a high-profile project for Calumet and MDU. It was the first refinery to open in the United States since 2008 and the first greenfield refinery built in the country since 1976.

But changing market conditions took a toll. When the Dakota Prairie refinery was being built, the plan was for the operators to buy cheap shale oil and turn it into diesel fuel and other products. But, by the time the refinery was up and running, shale oil prices had increased and the market for diesel fuel had weakened significantly.

MDU said it suffered a loss of $5.8 million during the refinery's first three months of operations and a $7.2 million loss from the refinery during the first three months of this year.

Calumet has been hit hard by falling oil prices in general. Last month, the company reported a first-quarter loss of $67.7 million. During a May 5 earnings call with investors, Go said the company planned to review its portfolio and “consider options to divest some of our assets.”

Calumet executives also said they wanted to reduce the company’s debt leverage.

Richard Patrick Murray, Calumet’s chief financial officer, said the company's debt leverage of 15 times earnings was “entirely too high,” and that the company was working to reduce that leverage to four times earnings.

In Tuesday’s press release, Calumet did not give details of how the Dakota Prairie divestiture will affect its leverage ratio. The company said it did not plan to make a related public filing with the U.S. Securities and Exchange Commission.

Calumet shares traded at $4.63 each late Tuesday morning, up 7.4 percent on the day. The stock has fallen 76 percent since the beginning of the year.

When developers announced the refinery project in February 2013, they said the plant would provide fuel for drilling rigs and for trucks, trains and other equipment in the western North Dakota oil patch. At the time, there were 184 drilling rigs in the region, each using about 3,000 gallons of diesel daily. There were only 31 rigs operating on Tuesday.

Diesel consumption in North Dakota has doubled from 452 million gallons in fiscal 2007, when the oil boom was in its infancy, to 926 million gallons in fiscal 2015, according to figures from the state Tax Department. However, consumption dipped slightly from fiscal 2014 to 2015.

Diesel consumption numbers are not yet available for fiscal 2016. North Dakota Petroleum Marketers Association President Mike Rud estimated that consumption is about half what it was two years ago.

"We just don't have the drill rigs and the trucks hauling along the interstate like we used to," he said.

Tesoro, which also owns a refinery in Mandan, North Dakota, about 100 miles to the east, said the purchase of the Dickinson refinery gives it "strategic access" to crude from the Bakken oil patch and presents an opportunity for growth in the state.

Tesoro will assume the $66 million in debt and contribute about $10 million toward working capital, the company said.

"We expect to generate more than $20 million in annual operating income from this business — even if the current economic conditions continue," said Greg Goff, Tesoro's chairman, president and CEO.

The refinery can process up to 20,000 barrels of western North Dakota oil each day into diesel fuel and other products. A barrel is 42 gallons. The plant employs about 75 people.

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