Alon Group Gets a U.S. Energy Boost

After several hard years, its American operations are generating big cash and profits, but boss Dudi Weissman remains cautious.

Dudi Weissman - CEO, major shareholder and driving force behind the Alon Group - is known in the Israeli business community as a tempestuous personality. He doesn't hide his opinions or mince words when he talks about his competitors, whether they are in retail or energy, the two big industries in which he operates.

But 15 hours away from Tel Aviv by plane, in the Texas city of Dallas, where the headquarters of his Alon USA unit are housed, the troubles back home with his Mega supermarket chain and BEE retail group seem lands away. The pastoral atmosphere, not to mention the attractive salaries relative to the cost of living, seem to have a calming effect on Weissman and the Israeli managers he employs

In the heart of Texas.

"We all moved our place of residence to Dallas and are enjoying the relaxed life out of the Israeli fray. But my family and I are Zionists who prefer our base of operations to be in Israel - even if in Israel, in contrast to the United States, success isn't appreciated," says Weissman, driving along the Dallas roads with music by Shlomo Artzi playing in the background.

Weissman spends two weeks out of every month in Dallas, where Alon USA is thriving after several difficult years. Now in its 13th year, it is the chief generator of cash for the Alon Group, Israel's biggest business group in the field of commerce and services, with annual turnover of more than NIS 9 billion.

Alon's other controlling shareholders are Shraga Biran and the Kibbutz Purchasing Organization. Under the management of Paul Eisman, Alon USA employs 3,000 workers.

After acquiring Dor Energy from the Dankner family in 1999, Weissman became the first Israeli to enter the U.S. energy business, acquiring the American assets of Belgium's Petrofina. Those included an oil refinery, fuel terminals, a pipeline and distribution operation in the U.S. Southwest for $400 million together with Africa Israel Investments.

A year later, Alon bought 172 7-Eleven convenience-store franchises in the Southwest. In 2005, it sold shares on Wall Street, raising $187 million for an acquisitions spree over the next three years, snapping up more energy and retail assets.

The strategy looked good. Alon USA generated $400 million in net profits from 2005-2008, paying dividends and seeing its stock price reach $40 a share in 2007.

Then tragedy struck. In February 2008, a fire broke out at the company's refinery in Big Spring, Texas, which accounted for much of the company's profits. Alon USA spent $500 million repairing the facility and even more supplying customers so it wouldn't lose them to rivals. The recession in the United States left the energy industry with overcapacity, and the company with heavy debt exposure. In 2009-2010, Alon USA ran up losses of $200 million while its share price fell to as low as $6.

The shareholders and the FIMI private equity fund came through with capital, and as the U.S. economy began to recover, Alon USA returned to profitability.

Defined risks

"In business you have to take risks, but they need to be considered risks, and always - always - you have to define them," Weissman says.

While the company's California operations continue to suffer, the Big Spring refinery is doing very well and was upgraded to a capacity of 70,000 barrels a day. It enjoys high levels of profitability because it is located in an area where West Texas Sour and West Texas Intermediate crude oil can be sourced more cheaply than petroleum from the Gulf of Mexico. Production costs are also low.

The strong results at Big Spring, the improvement in its retail business and good operating results at another refinery, Krotz Springs, prompted the investment bank Goldman Sachs to raise Alon USA to a Buy, with a target price for its stock of $21. Gold Sachs expects the company to post earnings - before interest, taxes, deprivation and amortization, or EBITDA - of $460 million for 2012 and record net profit of $150 million. Alon USA trading closed Wednesday in New York at $18.95.

On a net asset value basis, Alon USA has moved from nil, or perhaps several hundred million shekels in the red, to a positive NIS 1.5 billion.

Parent company Alon Group's debt includes NIS 2.1 billion (par value ) to bondholders from debt issued in Israel in 2007 and due between 2016 and 2023, and another NIS 700 million to banks, mainly Bank Hapoalim. Against that are assets including its 67% in Alon USA, worth NIS 2.72 billion; its Israeli retail business, valued at NIS 470 million; and its stake in the Tamar gas field, with NIS 581 million. There are also cash assets as well and the company operating the Route 6 toll road.

Tomer Appelbaum