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UPDATE 4-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

(Recasts throughout, adds quotes, details)

By Kristen Hays

HOUSTON, Oct 8 (Reuters) - Marathon Petroleum Corpis buying BP Plc's Texas City refinery, the site of adeadly industrial accident, in a $2.5 billion deal that willmake it the No. 4 U.S. refiner with a bigger potential slice oflucrative exports.

Marathon's share price shot to a record high early on Mondayafter it announced the purchase of the 451,000 barrel-per-day(bpd) refinery, the fifth largest in the country, in a dealanalysts said could give the independent refiner more leveragein the fuel export market.

"This is a unique opportunity to acquire world-scalerefining assets at an attractive price," Marathon ChiefExecutive Gary Heminger told analysts on Monday.

The company will not incur any liability stemming from the2005 explosion at the BP plant which killed 15 workers andinjured 180 more. BP paid more than $3 billion to settlelawsuits, cover fines and upgrade the refinery in the yearsafter the blast.

"Texas City has a rather complicated history and that alonehas made the valuation of this deal lower than it would havebeen otherwise," said Pavel Molchanov, an analyst with RaymondJames. "The multiple is cheap, that's why the shares of Marathonare up."

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.

Shares in Marathon rose to $60.04 early Monday, a recordhigh and a near 50 percent gain on levels when the stock firstbegan trading in June 2011. Shares closed at 57.80, up by 5.3percent.

In addition to the refinery, Marathon will acquire theplant's inventory, three intrastate natural gas liquidspipelines, four terminals and other assets. The deal is expectedto close early next year, Heminger said.

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

The base purchase price is $598 million, plus inventoriesestimated at $1.2 billion, Marathon said. The agreement alsocontains a provision to pay up to $700 million more over sixyears, depending on the refinery's profitability.

Marathon already owns one refinery in Texas City, a smaller80,000 bpd plant across a street from the BP refinery.

The smaller plant processes only light-sweet crude, whilethe big one can handle everything from light sweet to heavysour. That gives Marathon more ability to process cheap crudeproduced in the inland United States and Canada as well as theGulf of Mexico and imports, Heminger said.

EYES ABROAD

With the addition of the second Texas City plant, Marathonwould have a total of 1.64 million bpd of U.S. refiningcapacity, roughly 9.5 percent of the national total,concentrated in the Midwest and Gulf Coast.

Heminger said the deal would increase the company's abilityto export refined products, a growing business for U.S. refinersthat have the capacity to ship refined products abroad asdomestic demand slows due to changing consumer habits and thestruggling economy.

"Having another Gulf Coast refinery will allow us tooptimize our supply into Florida and into export markets," hesaid, adding that it has access to multiple marine docks.

Last year the United States became a net exporter of refinedproducts for the first time in 62 years, shipping out 439,000bpd more fuel than it imported as domestic demand waned andrefiners looked to foreign markets to bolster profits, accordingto U.S. government data.

So far this year, U.S. fuel exports have nearly doubledversus year-ago levels to about 2.85 million bpd, the U.S.Energy Information Administration said.

Marathon has already tapped into that burgeoning market,having increased product exports in to Latin America, SouthAmerica and Europe from its 490,000 bpd refinery in Garyville,Louisiana.

BP hasn't exported products internationally from the TexasCity plant, instead just sending fuels to the U.S. Northeastthrough the Colonial Pipeline. Marathon could change that withsome investment in docks, storage tanks and pipelines.

John Auers, senior vice president with refinery consultingfirm Turner, Mason & Co, said the U.S Gulf Coast refining hubwill keep using the combination of cheap crude, low natural gasprices and waning U.S. demand to become an export machine forworld products. He said Marathon's plans fit right into that.

"That's really the engine that's going to be driving the USGulf Coast refining industry, is ability to export products tofirst Latin America and South America, and then even beyondpotentially into Africa," Auers said.

PAID OFF

BP faced thousands of claims in civil lawsuits in theaftermath of the deadly 2005 explosion, which occurred afteryears of deferring maintenance. All told the company paid $2.1billion to settle those cases by the end of 2008.

BP also paid $185 million in fines from safety regulatorsand to resolve a federal criminal case stemming from the blast.

BP launched a $1 billion overhaul in late 2005 afterHurricane Rita damaged parts of the refinery.

Heminger said BP would maintain responsibility for any finesand penalties stemming from its ownership and operation of therefinery as well as any pending litigation and claims.

"We spent a tremendous amount of time in our due diligencearound this asset," Heminger said.

BP made an effort to wrap up legal loose ends to make theplant more attractive to buyers, Auers said.

THE REFINERY AND WHAT ELSE?

Heminger has consistently said the company was interested inacquisitions that gain assets beyond just a refinery, such aspipelines, terminals and supply contracts with service stationsthat work together in an integrated system.

He said contracts with retail gas stations as well as thepipelines, terminals and other logistics assets were a "keypart" of this transaction.

Marathon will acquire BP's access to the Colonial Pipeline,the nation's largest oil product pipeline; four productterminals in Florida, North Carolina and Tennessee; retailmarketing contracts to supply about 1,200 branded sites in thesoutheastern United States; and a 1,040-megawatt cogenerationfacility on the refinery site.

"Along with our logistics system we already have and withthe new logistics and we're going to acquire here, this gives usthe ability to move into these markets even more efficientlythan we have today," Heminger said.

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

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

Messaging: steve.james@thomsonreuters.com))

Keywords: MARATHON/BP