J.P. Morgan Chase & Co. is in talks to sell its oil-supply
agreement with a major Philadelphia refinery to Bank of America
Corp., according to people familiar with the matter.
J.P. Morgan has a deal with Philadelphia Energy Solutions under
which it supplies the refinery with crude oil and credit, and
receives refined fuel products in return that it can trade. The
refinery is one of the largest in the country, processing 330,000
barrels of crude a day, and is owned and operated by a joint
venture between Sunoco Inc. and private-equity firm Carlyle Group
LP.
The bank announced last year that it was selling its physical
commodity assets as regulatory scrutiny and pressure on the
business mounted, and returns deteriorated.
The refinery deal was initially included as part of a package of
physical commodity assets J.P. Morgan agreed earlier this year to
sell to Swiss trading house Mercuria Energy Group Ltd. for $3.5
billion. But Philadelphia Energy Solutions has a right of refusal
if J.P. Morgan seeks to transfer its interest to other parties.
Sources familiar with the talks said Philadelphia Energy
Solutions balked at accepting Mercuria as a partner in the
arrangement. Mercuria, meanwhile, wasn't interested in that part of
the business because it didn't meet the firm's targets for return
on capital, and because terms of the agreement would have limited
its ability to trade the refined products. The rest of the Mercuria
deal is expected to close this fall.
The discussions between the banks have been going on for some
time and it is still possible they could fall apart. J.P. Morgan is
seeking a buyer for its end of the agreement under broader pressure
from regulators to move banks out of physical markets for oil,
metals and other raw materials, and it remained unclear how
accepting regulators would be of another bank stepping into the
role. It is unclear what Bank of America's strategy for the
business would be.
There are multiple ways to make money from the refinery deal.
J.P. Morgan supplies the refinery with as much as 120 million
barrels of oil a year, collecting a per-barrel fee that can
generate up to $30 million in revenue annually, while also earning
interest on credit extended to the refinery and potentially
profiting from trades used to hedge the output against price
declines.
It isn't clear what the oil-supply agreement could be sold
for.
Washington-based Carlyle struck a deal to take control of the
Philadelphia refinery in 2012. Sunoco, which kept a one-third stake
in the facility, had planned to shutter the facility, which was
losing the company roughly $1 million a day. It was to be one of
several refinery closures along the Eastern Seaboard in recent
years.
The refinery accounts for about 25% of the East Coast's
oil-refining capacity, however, and the White House, fearful of a
fuel shortages and price spikes in the event of a closure, helped
broker the deal with Carlyle. J.P. Morgan took over supplying crude
to the 148-year-old refinery when Carlyle gained control.
Ryan Dezember and Sarah Kent contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com and Christian
Berthelsen at christian.berthelsen@wsj.com
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