Courtesy of Wall Street Journal

Until last year Andeavor was known as Tesoro, which means treasure in Spanish. The oil refiner that is being acquired by rival Marathon Petroleum for over $23 billion hadn’t produced that very consistently for most of its half-century history, though.

The U.S. shale boom smoothed the returns for what was a classic boom-and-bust industry. North American refining and logistics, the dowdier “downstream” part of the business, is now the place to be.

In the past five years, the three leading independent refiners-Andeavor, Marathon and current No. I Valero -have produced an average total shareholder return of 195%, about 110 percentage points better than the S&P 500. An index of oil producers is down by over 27% over the same period.

The deal, which should face few hurdles given minimal geographical overlap, would give the combined company 16% of U.S. refining capacity and is expected by management to lead to over $1 billion in annual synergies. If that holds up, Marathon projects that they are paying a modest 4.2 times projected 2020 cash flow for Andeavor.

The early years of the shale boom were helpful to U.S. refiners in a way that couldn’t be sustained. As supply of light, sweet U.S. crude surged amid a longstanding export ban, it went from a premium of over $1 a barrel over global benchmark Brent to an average discount of over $17 by 2012. Refiners benefit because different types of crude mean a price differential can create opportunities as refined products are priced much more uniformly on the global market. That situation acted as a subsidy for U.S. refiners. The end of that ban has brought the discount down to an average of over $4 a barrel this year.

But there is much more. Marathon and Andeavor are deeply invested in the logistics business and America’s transformation into the world’s top crude producer and possibly a net exporter within a few years makes existing and planned transport and processing infrastructure even more valuable. Having a big footprint in four of the nation’s five major refining regions will give the new company flexibility to exploit market dislocations wherever they arise and will make the overall business less choppy.

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