WSJ : Valero Backs Off as Oil Refining Turns Sour
By ANN DAVIS
Associated Press
Valero Energy is negotiating to sell this Delaware refinery, which it bought in 2005 and closed late last year.
.Struggling to survive the worst fuel market since the 1980s, Valero Energy Corp. is reversing an acquisition binge that had made it North America's largest oil refiner.
Valero is working to sell its remaining plants on the U.S. East Coast and in the Caribbean. It has put off international expansion plans. And on Wednesday, the company is likely to indicate whether it might cut its dividend to preserve cash further.
Kicking off what promises to be a dismal earnings season for independent refiners and the refining businesses of big oil companies, Valero is expected to report a 2009 loss that is far deeper than the $1.1 billion loss posted the year before. It is also expected to report that its operating results, which strip out write-downs, deteriorated sharply.
The U.S. Energy Information Administration on Thursday reported that U.S. refineries are operating at the lowest percentage of their capacity since the 1980s, excluding outages during hurricanes.
Diversified oil companies, from Chevron Corp. of the U.S. to France's Total SA, have been hurt by refining. And Valero's rivals among pure-play refiners also are ailing. Sunoco Inc. and Tesoro Corp. are expected to report fourth-quarter losses.
But few companies have felt the pain as intensely as Valero. The San Antonio company late last year dropped its claim to being North America's largest refiner, after shutting a major plant in Delaware. Since the start of 2008, Valero has lost 73% of its stock-market value.
Piling On
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.Valero said Friday it is in advanced negotiations to sell the Delaware refinery to an investor group led by the same refining-industry executive who sold it to Valero in a splashy deal in 2005. The plant's value likely has dropped. Valero also has tried to interest the executive, Thomas O'Malley, in its nearby Paulsboro, N.J., refinery, people familiar with the matter said.
Mr. O'Malley declined to discuss the negotiations but said "markets don't stay bad forever."
Valero meanwhile is scrambling to keep talks alive for a potential sale of its ailing refinery in Aruba to PetroChina Co., people familiar with those negotiations said.
Sounding a positive note, Valero executives told analysts last month that the company expects vehicle use to increase over the next two years as U.S. economic output returns to 2007 levels. Analysts credit Chief Executive William Klesse (pronounced KLESSee) for making several well-timed acquisitions in the ailing ethanol market.
But fears of a long period of refining overcapacity cloud industry forecasts. A surge of Middle Eastern and Asian mega-refineries are starting to export fuel around the world. They will account for 69% of the 9.3 million barrels a day of new refining capacity likely to go on the market between 2009 and 2014, according to Sanford C. Bernstein.
Higher fuel-efficiency standards and mandates on blending in renewable fuels, meanwhile, threaten to shrink use of conventional gasoline. Refiners also say they will be forced to pass on to motorists expected new penalties for greenhouse-gas emissions, which will cut demand.
"Refining is back to the business that most of us know. It is very competitive," Mr. Klesse said recently in his office. He said he is focusing on cutting Valero's costs because "I don't see a lot of top-line growth."
"I don't see the golden age of refining returning, at least not in my time," he said.
These rapid changes have undermined strategies that worked to Valero's advantage for years.
One was buying assets relatively cheaply. A former pipeline company, Valero grew by buying plants that large oil companies were shedding. Some were what Caris & Co. refining analyst Ann Kohler called Big Oil's "stepchildren," less sophisticated plants that suffered from a lack of investment.
Valero's other strategy was to process the cheapest crude oil on the market. It invested heavily to retrofit plants to turn what is known as the "bottom of the barrel" of crude, the high-sulfur, tar-like components that are least desirable, into high-quality gasoline. For years, cheaper raw-material costs more than made up for its higher fixed costs, and Valero sold its products at high prices.
But with the global recession, not only did fuel prices plummet, but the discount for the medium and heavy crudes that Valero refines largely evaporated. Saudi Arabia cut output of its cheaper grades. Worse, refineries the world over launched billions of dollars in plant expansions to process heavy crude, too. All this raised its price.
Mr. Klesse said he didn't see how much the discount for heavy crude would shrink and that he wished he had been able to sell more refineries before the downturn.
"We were on our way to selling down to a core of assets that could compete everywhere, but we didn't get there, for sure." |
