Reuters – Fri, 21 Oct, 2016 2:19 PM EDT

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By Greg Roumeliotis and John Tilak

(Reuters) - U.S. oil refiner HollyFrontier Corp (NYSE:HFC - News) is in advanced talks to acquire Suncor Energy Inc's (Toronto:SU.TO - News) Petro-Canada lubricants division for a little over $1 billion, after submitting the highest bid in an auction, according to people familiar with the matter.

The potential deal would allow HollyFrontier to diversify its refining business, which has suffered as a result of a gasoline glut that has eroded profit margins, while giving Suncor a cash boost with which to pay down debt incurred as a result of recent acquisitions.

The auction for the Petro-Canada lubricants business attracted other companies and private equity firms, the people said this week. Negotiations have not been finalized and the outcome could still change, the people cautioned.

The sources asked not to be identified because the deliberations are confidential. HollyFrontier and Suncor declined to comment.

Suncor, Canada's biggest energy company, merged with Petro-Canada in 2009. Petro-Canada is the world's largest manufacturer of white mineral oil, which is used in health and beauty products, pharmaceuticals, adhesives, plastics and elastomers. It purchased its lubricants business in 1985 from Gulf Canada.

The unit, based in Mississauga, Ontario, near Toronto, produces more than 350 advanced lubricants for industries ranging from beauty to heavy manufacturing. Some of its white mineral oils are sprayed on gummy bear candy to make it shiny and prevent sticking.

Headquartered in Dallas, HollyFrontier operates five refineries with 443,000 barrels per day of total throughput capacity. It markets its refined products principally in the Southwest, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. It has a market capitalization of close to $4.2 billion.

Crack spreads, the difference between the prices of crude oil and refined products, narrowed sharply this year due to a spike in U.S. inventories of refined products. HollyFrontier Corp said in August, however, that it did not expect to cut production of refined products.

(Reporting by Greg Roumeliotis in New York and John Tilak in Toronto; Additional reporting by Jessica Resnick-Ault in New York; Editing by Cynthia Osterman)