WSJ: Refining Investors' Long-Term Outlook
.By LIAM DENNING
Buyers of Valero Energy's latest 10-year bonds must possess extraordinary powers of prophecy.
The $850 million bond issue priced Thursday to yield 6.2%, a 2.6-percentage-point spread over 10-year Treasurys.
Valero has $4.8 billion of cash and undrawn credit compared with less than $500 million of debt maturing by the end of 2011, so liquidity isn't an issue. But that is partly because the refiner has cut dividends and capital expenditures to conserve cash.
Meanwhile, net debt to 2009 earnings before interest, taxes, depreciation and amortization is a hefty 4.8 times, according to CreditSights. And the strength of any upturn from the slump is open to question. BP's chief executive reckons U.S. gasoline demand peaked in 2007. Long-term challenges include overcapacity, potential climate-change legislation, vehicle fuel-efficiency gains and competing refineries being built overseas.
Valero issued another 10-year bond in June 2007, at the height of the refining boom. Priced initially at 1.2 percentage points over Treasurys, the spread hit 2.6 in April 2008. Back then, Valero still was profitable, and its shares traded at $74 (they are about $18 now). In addition, Lehman Brothers still was alive, a carbon-dissing president was yet to be elected and long-dated Treasury yields weren't facing upward pressure from fiscal deficits.
Valero isn't alone in tapping lenders at predeluge yields: Its bond pricing is in line with other refiners and triple-B-rated issuers. Yet consider that investors today can buy 10-year municipal bonds issued by the likes of double-A-rated New Jersey Transportation Trust Fund Authority for a similar after-tax yield, according to Municipal Market Advisors. In a zero-interest-rate world, even the best fortune teller's judgment can get clouded. |
