When a Refinery Joint Venture Ends in "Divorce" - What are the Assets Worth?

This refinery valuation was more complicated than typical. When the joint venture relationship went sour, fair market value of the refinery had to be determined despite intemperate private block share transactions, skewed competitive market, and a lowly maintained facility. After site visits and the review of relevant operational, maintenance, and financial information, we presented our value opinions in two expert reports and testified before the arbitration panel.

Refining joint ventures ("JVs") involving crude oil producers and refiners are not uncommon in the oil industry, especially when synergies exist that provide the JV with competitive advantages. However, when such advantages go unrealized, resulting in sustained periods of poor profitability, disagreements between the owners can often emerge. Such was the case involving a JV established in Eastern Europe, which resulted in the refining partner unilaterally terminating the JV agreement and taking over full control of the facility. The upstream partner subsequently filed an arbitration claim to recover what it believed to be its fair share of the refinery's value. The matter was heard before an arbitration panel under UNCITRAL rules in The Hague.

Baker & O'Brien was engaged to provide an opinion as to the fair market value of the refinery at or around the time of the dissolution of the JV. Our consultants visited the refinery to interview key management personnel, view the physical facilities, and gather relevant operational, maintenance, and financial information. We then prepared value estimates based on projected future cash flows, recent comparable market transactions, and the depreciated cost of replacement-the three standard methodologies typically applied in such appraisals.

However, several issues made this valuation somewhat more complicated than typical, including: (1) various private blocks of shares in the enterprise had been transacted at or around the date of the JV's dissolution, but it was difficult to ascertain whether these were true "arms-length" transactions; (2) a number of refineries in the country had previously closed due to intense competition from a highly-subsidized regional refinery, lending difficulty to any accurate prediction of future cash flow; (3) relatively little maintenance capital had been invested in the facility in recent years, raising questions about reliability and causing gasoline and diesel quality to be outside international standards; and (4) the refinery's distribution costs were unusually high due to the absence of any pipeline infrastructure.

Notwithstanding these challenges, we consolidated our value opinions, submitted two expert reports into evidence in the arbitration, and our lead consultant testified regarding our findings before the UNCITRAL arbitration panel.