According to Reuters, the deadly fire at Tesoro's (TSO) Anacortes refinery was caused by the catastrophic failure of a heat exchanger. Again according to Reuters, the plant had a history of OSHA violations in 2008. After considering the accident in the context of management's discussions of capex and of pushing back turnarounds and deferred maintenance in the 4th quarter earnings conference call transcript, I closed my remaining position.
Risk Management – here are some relevant excerpts from the transcript:
So, this whole program still complies with all of that but it has enabled us in some cases to differ(defer) some turnaround activity to fit with inspection results that we have so its based on good sound engineering and inspection information, but it's been a good program overall.
And we reviewed this with board and talking about what we are compromising, if anything, relative to reliability, safety and maintenance and we have spend time with one of the few companies that have an environmental health and safety committee which has people that have been in the industry and I think that the board is very comfortable with what we are doing and a lot of it is just better management all the way around, the scope and timing, but I think that the quick hit program to put it in a perspective, if you want to look at the bad margin environment that we've got even when you take in which reduces the EBITDA obviously for the tire industry, this program becomes even more meaningful with the smaller EBITDA, so is much more significant for our shareholders and we believe that over the course of time here that we've got to do everything we can to be able to augment our income in the low margin environment which we believe will be substantial and net of margin pick up, obviously will take the benefit that goes across to the entire market. So that's the perspective on our capital.
Again I can't give you the minimum number only because it will continue to depend on what Dan finds as they do the inspections. The risk management program we've got today, if you go back and look in time, we acquired refineries that all had schedules that were, I don’t know how many years. They went out for 10 years and what we are going to do, and they over laid each other and as time goes on, what you do is you find it. Like last year is a great example of the demand and we had a turnaround schedule last year. They were at the point of looking at that. We did some risk inspection work and we determined that we could move that by a whole year which we did. Dan’s moved one out this year out to 2011. Obviously the safety and reliability becomes imperative but the key gets to be that as you look at it, in the old days you just did the turnarounds because the risk base practice was to do it every three years on a certain unit or four years. I'm sort of in Dan’s area here but now it's really changed. So there more rigor going into the process of trying to really determine what that is.
The discussion is rational enough, and fact based: there would be a best practices schedule for routine maintenance and as a cost control measure engineering evaluations may permit extending the period between maintenance actions and reducing expenses accordingly.
The company has been under considerable margin pressure and this is the result. But in the wake of the serious accident, there is going to be a great deal of scrutiny of these types of decision.
Investment Implications – the refinery business is hazardous. High temperatures, high pressures, and flammable and corrosive chemicals create an environment where risk management and scheduled maintenance are critical. Obviously, pressure on operating margins adds an unwelcome dimension to this set of conditions.
My interpretation of Valero's (VLO) decision to close their Delaware refinery was that deferred maintenance had accumulated to the point where it made more sense to close it than to bring it up to spec. Intermittent operational difficulties preceded the decision. Apparently this sort of thing is ongoing in the industry.
In retrospect, at the point where the resources of a business of this type become strained with respect to capex (maintenance), it may be best avoid the situation as it may deteriorate in ways that are unpredictable.
How does it end? - As of this moment, the cause and responsibility for this accident have not been determined. While the conference call comments provide context for risk management and safety concerns at Tesoro, the actual facts of the case will be determined by OSHA. Here is how a similar case was resolved, from a biographical sketch of Thomas O'Malley:
In February 1999 an accident at a Tosco refinery in Avon, California, killed four workers and injured one. As a result, Tosco paid criminal fines and made donations that totaled $2 million. In an unusual step for O'Malley, indeed any chief executive, he appeared at a public meeting near the refinery shortly after the accident. He said: "I went out there and apologized and accepted responsibility. It was the most difficult experience in my life and one that I absolutely will never forget" (New York Times, February 11, 2001).
Disclosure: No position