Answer Maven

For those of you who may be interested, I wanted to follow-up to my Executive Briefing on Somerset Oil to let you know that this morning I was able to access the Grunberg Realty website.

It is interesting to note that Michael Grunberg, when interviewed about the Somerset Oil investment, stated that he wished to diversify his investments and after visiting Somerset felt that the business and people instilled the confidence to pursue the acquisition.

A few weeks ago I posted about the recent acquisition by New York based Grunberg Realty of Somerset Oil Refinery operations.  I have conducted a very brief investigation into the company and have provided the Executive Summary for your viewing pleasure below.

Note:  This briefing is a very brief overview and summary.  If you have an interest in a more in-depth analysis, of this company or any other company please contact me.

Somerset Oil Refinery

Executive Briefing

Current Owner Grunberg Realty, Michael Grunberg, Managing Principal (as of 10/13/2008 the Grunberg Realty site was not accessible.) Purchased for $2.2M. According to a Commonwealth Journal article the refinery is expected to be back in operation by early 2009.

(http://www.somerset-kentucky.com/local/local_story_272014547.html)

William Spears acquired the refinery from Frank Lynch and Roy Shirley in late 2007. Spears first business actions were to begin layoffs and a bankruptcy filing. Spears bid for the facility during the bankruptcy sale in early 2008 but the transaction was never finalized. The company then went onto the auction block with Lexington office of Transon Asset Advisors. The advertising undertaken by this auction company captured Grunberg’s attention.

History/Timeline:

1898 First pipeline build from Monticello, KY to Somerset, KY and on to Hamlin, WV. A corporation owned by R.C. Snyder purchased the Cumberland Pipeline Company in 1931. Retail operations began in 1932.

Crude Oil was purchased from KY, WV and TN wells and refined to produce 3 grades of gasoline.

Prior to the recent bankruptcies the company changed hands 3 times and was purchased in 1999 by a private entity. This entity became the parent of the supporting subsidiaries.

• South Kentucky Purchasing Inc. procured crude oil.
• Somerset Refinery, Inc. refined the crude oil.
• Sales & Transportation undertook the wholesale, commercial and retail marketing
• Somerset Environmental Services, Inc. provided environmental services in the field and laboratory.

The current structure is not known as the sale is not final (at time of writing) of Somerset Refinery to Grunberg Realty. However, previous structure can be located at http://somersetrefinery.net/Structure.htm (accessed on 10/13/08.)

At the time operations ceased the refinery employed 178 people. Somerset Pulaski Development Fund director, Carroll Estes was quoted in a Sept. 4, 2008 Daily Independent article that incentives were available to get the refinery operational again. (http://www.dailyindependent.com/opinion/local_story_247192843.html?keyword=secondarystory )

Another important detail to note for the new owner and the future of Somerset Refinery is that many small well operators have no source for their own crude to be refined. In the same Daily Independent article previously quoted the author states that the profitability of these small wells depends on a refinery that saves the expense of transportation.

Industry:

http://www.eia.doe.gov/emeu/steo/pub/contents.html This report is the EIA Short Term Energy and Winter Fuels Outlook from September 2008. Original projections of non-OPEC supply were affected by Gustav and Ike and the projection is now: 115,000 bbl/d during the second half of 2008 the first negative growth since 2005.

Analysis:

With oil prices dropping I’m not sure the future for Somerset Oil refinery is as bright as it was just a month ago. I do think that there is some solid business opportunity there as the small well operators try to profit from their reserves. If the new owner looks at this as a regional business the potential may prove the cost worthwhile. It seems that more and more people are trying to live locally in order to keep their own personal costs down. A business such as Somerset Oil should not ignore this new trend; it may just be the key to profitability.

S – Small refineries are “critical to meeting the Nation’s liquid fuel supply, because they make many fuel formulations that are unique to a particular region.” DOE Report: http://www.science.doe.gov/sbir/solicitations/FY%202008/23.EE.Petroleum.htm

W – Cost of operations is more expensive for smaller refineries.

O – The rejuvenation of small well operators in Tennessee and Kentucky will benefit from an operational refinery within closer proximity.

T – Credit crunch threatens ability to fund daily operations.

Caution: With the Grunberg Realty site down there may be some difficulty related to the latest economic turmoil that would put the latest acquisition in jeopardy. I will investigate further and provide an update at my earliest convenience.