Fitch: Tulsa Refinery Terms Indicate Tough Environment for Downstream Asset Sales.

CHICAGO -- Sunoco, Inc.'s (NYSE: SUN) announcement that it has reached an agreement to sell its 85,000 bpd Tulsa, OK refinery to a subsidiary of Holly Energy Corp (NYSE: HOC) for $65 million plus working capital adjustments is not expected to impact Sunoco's current ratings (Issuer Default Rating [IDR] 'BBB', Senior Unsecured Rating 'BBB', Commercial Paper [CP] and short-term IDR 'F2'), according to Fitch Ratings. However, Fitch notes that the low price at which the agreement took place indicates the tough conditions that face sellers of brownfield refineries in the current depressed environment, especially sellers of smaller facilities with limited conversion capacity and significant capex requirements.

The $65 million transaction equates to a sales price of just $745/barrel of refining capacity, according to Fitch calculations. This is sharply lower than recent refinery sales, including the $3,920/barrel sale of Valero's 85,000 bpd Krotz Springs, LA refinery to Alon USA (ALJ) in July 2008, and the $11,875/barrel sale of the 160,000 bpd Lima, OH refinery to Husky (HSE.TO) in July 2007. Both the Tulsa and Krotz Springs refineries are lower complexity facilities.

A key motivation for the sale of Tulsa was Sunoco's desire to avoid $400 million in capital costs required to bring the Tulsa refinery into compliance with EPA off-road diesel requirements. As a result, Sunoco announced last year that it would sell or convert the refinery into a products terminal. Trough valuations in the downstream are being driven by a combination of falling demand for refined product linked to the global economic contraction, near-term increases in U.S. and international refining capacity, and ongoing dislocations in credit markets, which have sharply raised financing costs for potential buyers. The steep drop in share prices across the energy sector has also diluted the value of stock as a deal currency for now, further limiting the ability of would-be buyers to finance purchases.

Fitch notes that the low price at which Tulsa is changing hands does not bode favorably for independent refiners or integrated oil companies looking to the sale of marginal refineries as a source of cash to fund other priorities in the current period. Refineries which are either on the block or are expected to be put out for sale in the near term include:

--Western Refining's 70,000 bpd Yorktown refinery;

--Valero's 275,000 bpd Aruba refinery;

--Dow's sale of its stake in the 146,500 bpd Vlissingen refinery in the Netherlands held in a joint venture with Total;

--Petroplus' 117,000 Teesside refinery in the UK, which management has announced will be sold or converted into a storage terminal.

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