Why Exxon Mobil's Exit From California Could Be Great for Investors

NEW YORK (TheStreet) -- Exxon Mobil (XOM) is reportedly preparing to sell its only oil refinery in California, following similar divestitures by BP (BP) and Royal Dutch Shell (RDS.A)  , and that's good news for investors of the Irving, Texas-based energy major.

That's because Exxon Mobil's plant was a "disadvantaged refinery" for the company, due to its small size and lack of petro-chemical integration or lubricants production, Oppenheimer senior analyst Fadel Gheit told TheStreet in an email. Gheit explained that "it doesn't fit [with] Exxon Mobil's downstream strategy, which is focused on larger, more complex integrated refineries with crude flexibility and petrochemical manufacturing."

Exxon Mobil's California refinery has a processing capacity of 155,000 barrels of oil per day, which makes it the second-smallest in the company's U.S. portfolio. The California plant is dwarfed by Exxon's Baytown refinery in Texas, the second-largest refinery in the U.S., which can process up to 584,000 barrels of oil a day.

So who is going to buy Exxon Mobil's California refinery?

The tough regulatory environment makes California a buyer's market, Gheit said. It's unlikely that the oil majors will step in, said Brian Youngberg, analyst at Edward Jones, in a phone interview. But there are several private buyers that may be interested, Youngberg said, particularly smaller companies.

Tesoro (TSO) , the second-largest independent refiner in the U.S., could also emerge as a possible buyer. It purchased Shell's 100,000-barrel-a-day refinery in 2007 for $1.63 billion and BP's 240,000-barrel-a-day Carson facility for $2.5 billion in 2012. Since then, Tesoro has not made any major acquisition in this space.

Another interested buyer might be PBF Energy (PBF) , a relatively small refiner worth $2.3 billion with three facilities and a processing capacity of nearly 540,000 barrels a day. PBF has been talking about buying a refinery in California since the beginning of this year.

Exxon Mobil's spokesperson Todd Spitler told TheStreet in an email that the company does not comment on market rumors or speculations. But Spitler elaborated that "ExxonMobil regularly evaluates its global portfolio of businesses" in light of the company's overall strategic business objectives and "remains committed to conducting business in California, as it has for more than 80 years."

Since the early 1980s, the number of refineries in California has dropped by nearly 60%, to 18 at the beginning of this year, according to U.S. Energy Information Administration. That's partly due to the strength in oil prices and a lack of crude transporting infrastructure.

The recent sale of refineries, however, is partly due to California's anti-trust and strict environmental standards that have made the Golden State a "difficult place to do business" said Youngberg. Some of the state's regulations are even stricter than the Environmental Protection Agency's. This is ironic since California is the biggest gasoline market in the U.S.

Additionally, the international oil majors aren't the only ones mulling leaving California's market. Gheit said Valero (VLO) and Phillips 66 (PSX) , which together own more than two dozen refineries across the U.S., are also planning to exit from California, "which puts three large refineries on the market."

Chevron (CVX) owns two of the largest refineries in California, which represent more than a quarter of the state's crude refining capacity. Tesoro owns two refineries, including its Los Angeles facility, one the largest refineries on the U.S. West Coast following its integration with BP's Carson plant.

Exxon Mobil was falling 0.8% to $95.28, extending its 2014 decline to 5.9% compared to a 7.8% advance for the S&P 500

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate EXXON MOBIL CORP (XOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, good cash flow from operations, increase in net income and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."

You can view the full analysis from the report here: XOM Ratings Report

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