Valero May Sell New Jersey, Louisiana, Aruba Plants (Update2)
By Victor Epstein
bloomberg.com
Aug. 31 (Bloomberg) -- Valero Energy Corp., the largest U.S. refiner, may sell plants in Aruba and as many as four states to tighten its focus on processing cheap grades of oil that yield the industry's widest profit margins.
The most likely U.S. plants to be sold are in New Jersey, Oklahoma, Louisiana and Tennessee, analysts said. San Antonio- based Valero in July sold its Lima, Ohio, plant for $1.9 billion and said it would continue to consider possible divestitures.
After four straight years of record earnings, Valero is buying back $6 billion in stock. Bill Klesse, who took over as chief executive officer in 2005, also is investing in upgrades to the refiner's most prized plants, those that make gasoline from high-sulfur crudes that sell at a discount. Breakdowns at plants contributed to $590 million in so-called lost-opportunity costs in the second quarter alone.
``Valero's overall refining system is not the best,'' said Charles Ting, an analyst at Lehman Brothers in New York. ``That's why Klesse sold Lima and is looking to sell others. He's using the proceeds to high-grade his best refining assets.''
Klesse's predecessor, Bill Greehey, built Valero into the biggest refiner in the world's largest fuel market through acquisitions at a time when plants were far cheaper. For instance, Greehey capped the acquisition binge with his purchase of Premcor Inc. in 2005 at a price that worked out to less than $9,000 per barrel of processing capacity.
Premcor Plants
Valero sold the 120-year-old Lima plant, deemed the least desirable of the former Premcor refineries, for about $11,500 a barrel. The former Premcor plant in Port Arthur, Texas, is Valero's largest refinery and handles high-sulfur oil.
Klesse, who declined to be interviewed for this article, favors large refineries with coastal access, analysts said.
``We expect the asset rationalization program to continue at Valero,' said Roger Read, an analyst with Natixis Bleichroeder Inc. in Houston. ``Several of their landlocked refineries could be disposed of.''
Klesse also likes the cost advantage of crudes like Mexican Maya, which sold for $15.41 barrel less, on average, than a grade called Louisiana Light Sweet in the second quarter.
Among the U.S. Valero plants analysts peg as most likely to be sold, only a refinery in Paulsboro, New Jersey, has a delayed coking unit, a device that converts heavy crude and residual oil into lighter products and petroleum coke. Cokers play a key role in Valero's overall strategy of increasing its capacity to refine cheap grades of heavy and sour crude.
Divestiture Prospects
``It is a wise strategy,'' Ann Kohler, an analyst at Caris & Co. in New York. ``I would not be surprised to see Valero sell another refinery this year and one or two next year.''
Among the most likely candidates, said Kohler, Ting and other analysts, are plants in Memphis, Tennessee; Krotz Springs, Louisiana; and Ardmore, Oklahoma. Another possibility, said Kohler and Ting, is a plant in Sunray, Texas. Valero's 17 refineries can process 3.1 million barrels of oil a day.
The sale of any two of those plants would diminish Valero's processing capacity by at least 6 percent.
Valero shares rose 95 cents to $69 at 12:37 p.m. in New York Stock Exchange composite trading. The stock has climbed 35 percent this year, helped by the buybacks.
Ting said Valero branded its Aruba plant as a possible divestiture target by failing to do all the improvements that were planned when Greehey bought it in 2004.
Aruba
Then there's a sticking point between Valero and Aruba: the expiration of a tax exemption that existed when the company bought the plant, said Henry Baarh, minister for Aruban affairs at the Royal Netherlands Embassy in Washington. The owner of the refinery will start paying the standard corporate tax rate of 28 percent in 2011, he said.
``There have been some things said in the local press by both sides,'' Baarh said yesterday in a telephone interview. ``But the problems are between the tax lawyers,'' not Klesse and Aruban Prime Minister Nelson Oduber.
Richard Marcogliese, an executive vice president who heads Valero's refinery operations, said July 31 that the company is exploring plant upgrades in Port Arthur and St. Charles, Louisiana. The company also plans to replace coker drums at those plants.
Plant Breakdowns
Valero has reported nine malfunctions at Port Arthur since July 22, including an Aug. 5 fire. A July 28 storage leak hospitalized 39 people, according to a local newspaper report.
Valero could derive $1 billion in savings in the next five years by lifting the reliability of its plants to the top quartile from their current standing in the bottom quartile among U.S. refineries, Klesse said on a July 31 conference call with investors and analysts.
``We are taking a good hard look at our whole portfolio of assets,'' Valero spokesman Bill Day said. ``If we find something where we can unlock some value and it makes sense to be part of someone else's system, then we will look at strategic alternatives, one of which could include a sale.''
Valero had lost-opportunity costs of $850 million in this year's first six months. The figure includes sales that would have been made had production not been disrupted by breakdowns.
To contact the reporter on this story: Victor Epstein in Houston at vepstein@bloomberg.net .
Last Updated: August 31, 2007 12:45 EDT |
