Japanese Oil Refiners in Merger Talks as Falling Prices Bite

TOKYO—Japanese oil refiners JX Holdings Inc. and Tonen General Sekiyu are in talks about a possible merger, a person familiar with the matter said Monday.

JX Holdings, Japan's biggest refinery by sales, approached the smaller Tonen General, the person said.

The talks reflect a push by oil and gas producers to join hands amid a prolonged slump in oil prices and shrinking demand.

Last week, JX Holdings' rival Idemitsu Kosan Co., Japan's No. 2 refiner, and Showa Shell announced they had reached an agreement to merge as early as next year.

A JX Holdings combined with Tonen General, Japan's No. 3 player, would command about half of Japan's market for refined products, and about double Idemitsu's and Showa Shell's combined market share.

Both JX Holdings and Tonen General said in separate statements that they are searching for ways to increase the competitiveness of their refinery operations but nothing has been decided.

A shrinking population, declining industrial activity and the advent of hybrid and electric vehicles have resulted in cutthroat price competition among refiners, draining their finances. Japan's gasoline consumption has fallen 2% to 3% a year over the past decade, and the average price nationwide is at a five-year low.

The pressure on refiners shows few signs of easing. Despite a protracted slump in oil prices, producers in Saudi Arabia, Iraq and Russia aren't cutting production, pushing global crude inventories to near a record 3 billion barrels as of the end of September, according to the Paris-based International Energy Agency.

JX Holdings is the result of a 2010 merger between former Nippon Oil Corp. and Nippon Mining Holdings. Now with a market cap of ¥ 1.21 trillion ($9.88 billion) the company operates about 10,780 gasoline stands throughout Japan under the Eneos brand and is on the hunt for oil and gas development projects in the North Sea, Malaysia and Vietnam.

Tonen General, which bought up Exxon Mobil Corp.'s Japan operations in 2012, operates about 3,480 stands in Japan under the Esso, Mobil, and General brands. It has a market cap of ¥ 713.8 billion ($5.83 billion).

The companies could sign an agreement by year-end, and JX Holdings plans to eliminate excess supply capacity, the Nikkei reported Monday.

Regulatory approval of the two mergers—one between JX Holdings and Tonen and the other between Idemitsu and Showa Shell—could eliminate a production capacity glut in Japan, analysts said.

The industry's outlook depends on whether and how quickly the merging companies would be able to eliminate overlapping capacity and consolidate sales and logistics networks, said Shigeki Matsumoto at Nomura Securities.

Historically, mergers between Japanese companies have been slow to result in streamlining of redundant operations.

Earlier this month, JX Holdings slashed its forecast for annual net profit by 72% to Y45 billion for the financial year through March. It cited the decline in oil prices, the resulting rise in inventory costs and shrinking margins, as well as a hit to its metal resources operations by a fall in copper prices.

Falling oil prices forced Tonen General to cut its forecast for net profit by 92% for the year ending in December.

Write to Mayumi Negishi at [e-mail]

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November 16, 2015 00:55 ET (05:55 GMT)

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