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Chevron to Divest Downstream Assets to Parkland for $1.5B


California-based integrated energy company Chevron Corporation CVX is planning to divest its stake in downstream fuel business to Canada’s fast growing independent fuel distributor, Parkland Fuel Corporation. This is Parkland’s third and biggest acquisition deal with Chevron.

Deal Highlights

The transaction involves the sale of 129 retail gas stations in Vancouver as well as Chevron’s Burnaby refinery in British Columbia. Additionally, the deal includes the sale of 37 commercial cardlock and three marine fuelling locations. Parkland will also acquire three terminals in British Columbia and a wholesale business which includes aviation fuel sales to Vancouver International Airport.

Parkland plans to fund the deal – valued at $1.5 billion –through a mix of equity offering, debt and cash. The company intends to raise $660 million through the issue of 24 million shares, $268 million through revolving credit facility and another $500 million by entering into a bridge loan agreement facility. The remaining $40 million will be paid in cash.

Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure by mid-year.

How will Chevron Benefit from the Deal?

The agreement is well aligned with Chevron’s strategy to improve its cash flow in 2017. The company is focusing on divestment opportunities to exit noncompetitive projects and cost and capex reduction which in turn will provide a more competitive and leaner business model for the company.

Chevron divested $2.8 billion in assets in 2016. The deal will help the company to progress toward its $10 billion divestment goals in 2017. Additionally, the agreement will help the company to focus on balancing its global portfolio with its long-term business priorities. Further, it will allow the company to slash costs and streamline business models amid plunging oil prices.

Parkland Set to Gain from the Deal: Here’s Why

For Parkland, the deal complements 44 existing Chevron branded sites it has in British Columbia making the company Canada’s largest fuel retailer by site count, with 1800 locations. By acquiring the premier fuel marketing business, Parkland will become the exclusive distributor of Chevron-branded fuels.

The acquisition is expected to support and enhance Parkland’s existing operations in British Columbia. Thus, Parkland will have an annual savings of $35 million–$50 million within three years of the completion of the deal. The company has been acquiring retail fuel stations across the country. In 2016 the company acquired Alimentation Couche-Tard Inc.’s Quebec and Atlantic Canada retail fuel business for $965 million. It had also bought Esso stations in Saskatchewan and Manitoba in a deal with Imperial Oil Limited IMO. The deal further builds on the $750 million acquisition of CST Brands Inc.’s Canadian assets providing the company with significant opportunities of synergies.

The acquired infrastructure assets including terminals, marine docks and pipeline access are expected to enhance the company’s supply advantage and open new opportunities in fuel imports and exports. According to the CFO of Parkland, the transaction is likely to add around $230 million to the earnings. All in all, the deal is a prudent decision as Parkland is poised to grow backed by the deal.

Zacks Rank & Key Picks

Chevron is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.

The company shares rallied almost 4% over the last six months, outperforming the Zacks categorized Oil and Gas Integrated International industry’s gain of around 0.7%.

However, Chevron has reported negative average earnings surprise of 16.46% in the preceding four quarters.

The company currently carries a Zacks Rank #3 (Hold).

Better-ranked players in the same industry include Repsol, S.A. REPYY and Eni S.p.A. E. Both the companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Repsol reported an average positive earnings surprise of 46.34% in the trailing four quarters.

Eni is expected to generate year-over-year growth of 762% in its earnings in 2017.

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