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UPDATE 3-Marathon to buy BP Texas City refinery for up to $2.5 bln

* Marathon to purchase refinery for $598 million

* Inventory worth around $1.2 billion

* Marathon shares soar, analysts see deal priced cheaply

(Updates with detail, background)

By Kristen Hays

HOUSTON, Oct 8 (Reuters) - Marathon Petroleum Corpstruck a deal to buy BP Plc's Texas City refinery andrelated infrastructure for up to $2.5 billion, a purchase thatwill make Marathon the fourth-largest U.S. refiner and give it abigger potential slice of the market for refined productexports.

Marathon said on Monday it had agreed to buy the451,000-barrels-per-day refinery, the fifth-largest in thecountry, as well as the plant's inventory, three intrastatenatural gas liquids pipelines, four terminals and other assets.

The news sent shares in Marathon to a record high of $60.04on the New York Stock Exchange. Since the stock began trading inJune 2011, it has risen nearly 50 percent.

The base purchase price is $598 million, plus inventoriesestimated at $1.2 billion, Marathon said.

The agreement also contains a provision to pay up to $700million more over six years, depending on the refinery'sprofitability.

"The multiple is cheap, that's why the shares of Marathonare up," said Pavel Molchanov, an analyst with Raymond James."Texas City has a rather complicated history and that alone hasmade the valuation of this deal lower than it would have beenotherwise."

For factbox on Marathon's refining operations, click on.

The Texas City refinery was the site of a 2005 explosion,one of the worst industrial accidents in U.S. history. The blastkilled 15 workers, injured 180 others and cost BP more than $3billion to settle lawsuits and pay fines.

In March, BP exited a three-year probation term stemmingfrom the explosion, and in July the company agreed to pay $13million to settle most post-blast safety violations at theplant.

With the $700 million earn-out arrangement, the deal'svaluation is $1,880 per barrel of refining capacity and $328 perbarrel without it, Molchanov said. A more typical valuation inrecent deals has been $2,000 per barrel, Molchanov said.

The deal brought together a motivated seller and anopportunistic buyer, said Fadel Gheit, an analyst withOppenheimer & Co.

"This is absolutely the best thing they have done since theybecame a public company," Gheit said, referring to Marathon'sspinoff from Marathon Oil Corp last year.

BP said the sale, expected to close early next year, wouldbring its divestments since 2010 to $35 billion as it shedsassets to focus operations better and pay the costs of itsdisastrous 2010 oil spill in the Gulf of Mexico.

The transaction, seen boosting earnings in the first year ofoperation, is expected to be funded with cash on hand, Marathonsaid.

Marathon Chief Executive Gary Heminger has consistently saidthe company was interested in acquisitions that gain assetsbeyond just a refinery, such as pipelines, terminals and supplycontracts with service stations that work together in anintegrated system.

"What I've always said in the past is that we are onlyinterested in a system. By that I mean some pipelines, someretail or wholesale that goes with the refinery," Heminger toldReuters in an interview earlier this year.

The BP deal provides those extras. In addition to therefinery, Marathon will acquire BP's access to the ColonialPipeline, the nation's largest oil product pipeline; fourproduct terminals in Florida, North Carolina and Tennessee;retail marketing contracts to supply about 1,200 branded sitesin the southeastern United States; and a 1,040-megawattcogeneration facility on the refinery site.

EYE ON EXPORT MARKET

Also, Marathon can increase refined product exports to LatinAmerica and Europe, as it has with its 490,000-bpd refinery inGaryville, Louisiana. That refinery exported 110,000 bpd ofproducts, mostly diesel fuel, in the second quarter this year,which executives said was its "reasonable maximum".

The Texas City plant does not export products under BP'sownership, but it could with investment in docks, storage tanksand pipelines.

Heminger said in a statement on Monday that the deal can"enhance our ability to sell products into export markets".

So far this year, U.S. fuel exports have nearly doubledversus year-ago levels to about 2.85 million bpd, according toU.S. government data, as domestic demand declines and refinerslook to foreign markets to bolster profits.

Marathon has a small, 80,000-bpd refinery in Texas City thatprocesses light-sweet crude and has benefited from burgeoningsweet crude output from the Eagle Ford shale play in southTexas. The BP Texas City refinery can process various kinds ofcrude, from light-sweet to heavy sour.

BP will keep the Texas City complex's chemical plant.

John Auers, senior vice president with refinery consultingfirm Turner, Mason & Co, said sellers typically keepresponsibility for outstanding liabilities when selling assets,but prior settlements with U.S. safety regulators had clearedthe way for a sale.

"It's always better to close it up as much as possible andBP was trying to do that," Auers said. "They're trying to makeit as clean a sale as possible."

(Additional reporting by Steve James and Michael Erman in NewYork and Anna Driver in Houston; Editing by Dale Hudson, LeslieAdler, Maureen Bavdek and Chris Baltimore)

((steve.james@thomsonreuters.com)(1-646-223-6013)(Reuters

Messaging: steve.james@thomsonreuters.com))

Keywords: MARATHON/BP