Valero Energy: Bidders Vanish, Pulls Two Refineries from Market

For several years Valero Energy Corp. (VLO) has been trying to divest its non-core refining assets, and early bidding action for refineries was fierce (and global) when it began in early 2007. Valero sold its Lima refinery for $1.9 billion, turning a tidy profit and creating a high-implied value for the company’s 15 other refineries. That was then….

On Wednesday, Valero announced it was formally pulling two of the three refineries being bid out for the past year. Only the Aruba facility, with a 255,000 bpd capacity, still has a price tag on it. And what does it read? Current estimates are for $1 - $1.5 billion, compared to the Lima refinery, which had a throughput of only 165,000 bpd. Such is the state of oil these days - 55% higher capacity facilities selling for 2/3 the price, if a sale can even be reached.

But all negativity aside, there’s still tremendous value in Valero’s assets. If Aruba is indeed a subpar ROI performer in the portfolio, then by all means Valero should divest it. Cash does remain king. But the company should take care to divest the bare minimum needed to raise capital for repairs and capex in 2009, and otherwise just wait out the storm. Valero remains the best in breed refiner with its ability to process cheaper Mexican sour crude, and thereby keep crack spreads higher than the competition. When global demand for crude rebounds, Valero should allow istelf to realize the appreciation of its huge asset base, and do it in an environment where companies can actually finance the deal.

Parting Thoughts

Looking over the balance sheet, if we were to wipe out the all the goodwill ($4B) and write-down the PP&E by 20%, Valero shares would still be trading below book value. Most of the refining assets are carried on the books at cost, so the 20% “stress test” is a clear reflection of the margin of safety surrounding the equity. Valero’s shares are at compelling valuations, and as oil steadies at lower prices, look for a tightening of distillates and gas prices to boost margins in the first half of 2009.

Disclosure: Author does not hold a position in VLO.

Comments

[G. Kahn:]

Many analysts suspected that the posted sale of Aruba was not about trying to divest of a poor ROI asset, but about negotiating a new contract with the Aruban government. They announced the effort to sell the Aruba refinery as their special tax-advantage was approaching expiration. Up until they talked about that refinery as being particularly strategic, and often used a picture of it as a symbol of the efficiencies in their overall portfolio.

Valero poored a lot of money into that refinery. It's been very good for them and Aruba; they just want to renew the tax provision, so they threaten to sell it to someone who won't benefit the island as much as they have. That's the theory anyway.

I don't think raising the cash is a real issue. It seems likely that they'll be cutting back on cap-ex, and the raw materials have obviously plunged in price as well.

2008 Dec 04 09:20 AM

[Tom Armistead:]

I agree, VLO and TSO are still trading at discounts based on the book value of their assets, although this is less extreme given the sales price both were using for comparison purposes is no longer applicable.

2008 Dec 04 11:28 AM

[Ryan Barnes:]

Solid points given here...Management has maintained for some time that Aruba is not part of the long-term strategy to focus on higher-tech, "complex" refinery assets. The tax credit is set to expire in 2011, so the impetus to get the sale done early is based on monetizing it the best way they can. A new owner would be more incentivized if they had 2 years of favorable tax rates, as opposed to 1 year or 6 months.

PBR was an early bidder, but they've got financing problems of their own right now. Aruba will need a lot of investment & upgrades over the next decade, and the new owner will need to be well capitalized. But the margins at the refinery will remain competitive (Mayan crude) and someone will step in for $1.2b or so...Valero bought the facility in 2004 for just $365m, so a profit will be booked regardless.

2008 Dec 04 11:48 AM

[macsmart:]

VLO is trading at an extremely attractive valuation.

2008 Dec 04 01:17 PM