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Valero Pulls Two Refineries Off the Market As Bidders Vanish (VLO)

Posted on | December 3, 2008 Time: 1:38 pm |

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….

Today 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 they 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. Valeros 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.

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Category: Crude Oil, Fundamental Analysis
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