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Kerkorian makes bet on oil

Oct 30, 2007 3:56 AM

Billionaire Kirk Kerkorian is well-known for his investments in the gaming, automotive and airline industries but little has been written about his interest in the hot topic of Wall Street: oil.

Friday, Kerkorian’s investment arm, Tracinda Corporation, caught everyone’s attention when it announced that it was offering to buy 28.75 million shares representing a 16% stake in Tesoro Corp., a major oil refiner with six refineries in Middle America

Kerkorian is familiar with the company since he already owns 5.5 million shares or about 4% of the total number of shares outstanding.

The $64 cash offer amounted to a 12% premium over the Thursday closing price for TSO shares. During trading on Friday, the shares moved up to a high of $65.98.

In announcing the offer, the company said, "Tracinda believes that the fundamentals of the petroleum refining industry make it an attractive area for investment. Tracinda has chosen to invest in Tesoro because Tracinda believes that the company is well-positioned within the industry and has a management team that is effectively executing its strategic plan."

But, just last week in an interview over CNBC, an oil executive was asked why no refineries have been built in the United States during the past 24 years, he replied, "Because the profit margins in refining oil are too small to justify the cost of construction. That’s why the smaller refiners have been bought up and the larger refineries have been expanded to handle the country’s gasoline needs."

To offset the marginal profit problems, Tesoro’s chief economist, Lynn Westfall, said refineries may cut back production, buy cheaper crude and cut costs to preserve their bottom line. With the price of oil rising above the $90 mark, that doesn’t bode well for the price of gasoline. The price of oil on Monday hit a record $93.53 a barrel.