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Discussion piece on Valero being a cheap stock, Reliance taking a run at them and other potential suitors (Lukoil, KPC)
Article:Valero Gains 52% in Sale Value on Oil Refinery Profits::/g/a/2011/10/28/bloomberg_articlesLTREAR0D9L37.DTL
Valero Gains 52% in Sale Value on Oil Refinery Profits: Real M&A
Tara Lachapelle and Bradley Olson, 2011 Bloomberg News
Friday, October 28, 2011
Oct. 28, 2011 (Bloomberg) — After surging 20 percent on takeover speculation, Valero Energy Corp., the most profitable U.S. oil refiner, is still cheaper than 99 percent of corporate America.
Valero, the largest independent U.S. refiner, sells for 5.7 times this year’s estimated profit, less than half the median for non-financial stocks in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The company, which this week had its biggest two-day advance since 2008, is trading at a discount even after earning more before interest and taxes per barrel of crude oil processed than its competitors.
While U.S. companies from Chevron Corp. to ConocoPhillips are selling refineries to focus on higher-margin businesses such as oil production and regulatory hurdles may limit takeovers by foreign buyers, Valero would be an attractive target for India’s Reliance Industries Ltd., Russia’s OAO Lukoil or buyout firms, Muse Stancil and IHS Herold said. Valero, valued at an industry low of $575 per barrel after adjusting for product quality, may command $40 a share in an acquisition, according to Edward Jones & Co. That’s a 52 percent premium to its price yesterday.
“If you want to make a big splash in refining in the U.S., Valero would be the biggest prize out there,” Brian Youngberg, an analyst at Edward Jones in St. Louis, said in a telephone interview. “The company has been very well managed through the ups and downs and is well positioned for the future. They make sense as a takeover candidate.”
Bill Day, a spokesman at San Antonio-based Valero, declined to comment on takeover speculation.
Valero, which has more than a dozen refineries in North America that process about 3 million barrels of crude oil a day, supplies petroleum products from gasoline and diesel fuels to ethanol, asphalt and sulfur, according to the company’s website.
Its stock has surged since the U.K.’s Daily Mail reported on Oct. 26 that Reliance Industries is poised to make a bid for $48 a share. The offer would value Valero at $27.5 billion, about 80 percent higher than its market capitalization of $15 billion, data compiled by Bloomberg show.
While the rally added $2.5 billion to Valero in two days, its shares are still among the least expensive in the S&P 500, the benchmark gauge of American common equity. Valero trades at 5.7 times analysts’ projections for per-share earnings of $4.63 this year, according to data compiled by Bloomberg.
Non-financial shares in the S&P 500 are valued at a median 14.5 times estimated profit, the data show.
“Valero is rather cheap on really every metric you look at,” Cory Garcia, a Houston-based analyst at Raymond James Financial Inc., said in a telephone interview. “There is obviously appeal to their assets.”
Valero posted earnings before interest and taxes of $1.88 billion last year, or $3.30 for each barrel of oil it processed.
That was the highest among eight independent U.S. refiners, data compiled by Bloomberg show. Tesoro Corp. of San Antonio earned $1.50 per barrel, while Philadelphia-based Sunoco Inc. had $1.10 in pretax profit per barrel, the data show.
Valero is more profitable partly because of its refineries’ so-called high complexity, or the ability to take lower quality crude and use it to produce higher margin products, according to Raymond James’s Garcia. That makes it an attractive target for companies seeking to gain a foothold in U.S. refining, he said.
Valero would make sense for Reliance Industries, the $58 billion oil refiner controlled by billionaire Mukesh Ambani, India’s richest man, according to Neil Earnest, practice leader for mergers and acquisitions at Muse Stancil, a Dallas-based consulting firm that specializes in the energy industry.
Reliance Industries, which will have more than $16 billion in cash by year’s end, has sought to boost its refining capacity and energy presence outside India. The Mumbai-based company has purchased stakes in shale-gas projects in the U.S. and made bids for LyondellBasell Industries NV and Value Creation Inc., a Canadian oil sands company, which both failed.
The $14.5 billion offer for LyondellBasell, which the Rotterdam-based company rejected last year, would have given Reliance Industries control over a 302,300-barrel-a-day refinery in Houston designed to process heavy, high-sulfur crudes.
Valero owns Gulf of Mexico refineries that Reliance Industries could use to export gasoline or diesel back to India or the rest of the world, said Harold York, vice president of downstream consulting for Wood Mackenzie in Houston.
Lukoil of Moscow and Kuwait Petroleum Corp. could also be interested in acquiring Valero, John Parry, a senior analyst with IHS Herold, said in a telephone interview.
“The U.S. is an attractive market for those foreign companies as they try to diversify away from their own countries,” Edward Jones’s Youngberg said. “Any foothold they can get in the U.S. makes sense given the low political risk and the opportunities here with shale development.”
Manoj Warrier, a spokesman at Reliance Industries, and representatives for Lukoil and Kuwait Petroleum didn’t immediately respond to telephone calls or e-mails outside normal business hours.
Still, U.S. government scrutiny of any oil industry takeover by a foreign company may dissuade potential acquirers from making a bid for Valero, according to Phil Flynn, vice president of research at PFGBest in Chicago.
In 2005, political opposition derailed a $19.4 billion offer for El Segundo, California-based Unocal Corp. by Cnooc Ltd., China’s largest offshore energy producer.
“Remember all the wailing and gnashing of teeth when China wanted to take over Unocal?” Flynn said in a telephone interview. “A foreign company coming in to buy our refineries is going to raise some eyebrows.”
‘Feast or Famine’
The biggest U.S. oil companies are also selling refining assets to focus on more profitable businesses such as offshore oil exploration and North American natural-gas drilling.
Pumping crude and natural gas is at least 40 times more profitable than turning oil into gasoline and diesel for the three biggest U.S. producers, data compiled by Bloomberg show, even as refining margins tripled in the past year.
San Ramon, California-based Chevron, the second-largest U.S. oil company, sold its last remaining European processing plant in August. A month earlier, Houston-based ConocoPhillips, the nation’s third-largest energy company, said it will split off its oil refining business by the end of June 2012.
“The refining business is feast or famine,” Flynn said. “That’s not to say there isn’t a niche or a need, but when you see a lot of people that just want to get out of the business, you know it’s a very difficult time for the industry.”
While Valero may be undervalued because it is spending cash on expansion rather than returning it to shareholders, its efforts to upgrade refineries to process cheaper grades of crude into more valuable petroleum products will help earnings increase “substantially,” Edward Westlake, an analyst at Credit Suisse Group AG, said in an Oct. 26 report.
“Refining assets are going to increase in value over time because world oil demand is growing,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said in a telephone interview. “With the U.S. Gulf Coast supplying other areas of the world an increasing amount of petroleum products, Valero’s refineries are well situated to take advantage of those export opportunities and someone could be interested.”
–With assistance from Jessica Resnick-Ault in New York. Editors: Michael Tsang, Daniel Hauck.