Oct. 21--Dallas refining company Holly Corp. will buy a second refinery in Tulsa, this one from Sinclair Oil Corp., for $128.5 million.

The company said Tuesday it plans to connect the new refinery with another Tulsa refinery it bought in April from Sunoco for $65 million. By combining the facilities, Holly can eliminate $125 million in environmental upgrades to meet new sulfur requirements for diesel and make higher-margin products.

"It saves us about the same amount of capital as we paid for the acquisition and increases our profit by upgrading that portion of our profit that had to be sold at a discount," said Holly chief executive Matt Clifton. He said the new facility can make some of his low-margin product into higher-margin fuel.

Caris & Co. analyst Ann Kohler said the price is low and even sets a "low-water mark" for asset sales for the recession.

The acquisition boosts Holly's fuel-making capacity, and it comes at a time when diesel demand remains depressed and politicians are calling for vehicles that don't use petroleum at all.

Earlier this month, the American Petroleum Institute said gasoline deliveries rose 6.6 percent in September from last year, but distillate, which includes diesel and jet fuel, dropped 1.5 percent because of the recession.

Until Americans start buying more goods again, and more diesel-consuming trucks start rolling, diesel demand isn't likely to return.

Clifton isn't worried. He said about 39 percent of the combined facility's output will be diesel, 44 percent will be gasoline, 10 percent will be specialty lubricants and the rest will be asphalt, butane and propane.

He added that a shift toward electric and natural gas vehicles could eventually lower demand for gasoline, but "we think there's always going to be a demand for some amount of gasoline, and we think diesel demand will remain relatively strong."

Besides adding capacity, one major benefit to Holly about the new plant is that Sinclair already spent $300 million to upgrade the refinery to meet new sulfur standards.

By combining the new 75,000 barrel-per-day refinery with the existing 85,000 barrel-per-day facility 2 miles away, Holly can make better use of the equipment at both plants.

Holly can pipe diesel fuel from the current plant to the Sinclair plant and use excess capacity there to desulfurize the fuel. By spending $10 million to expand that diesel unit, the company can avoid spending $125 million to upgrade the existing facility to meet new sulfur regulations, Clifton said on a conference call with analysts.

Holly will pay for the Sinclair refinery with $54.5 million in cash and the rest in shares.

With the acquisition, Holly will also sign a deal with Sinclair to supply the company's Midwestern service stations, which use the green dinosaur logo.

Bloomberg News contributed to this report.

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