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Wednesday, January 27, 2010
Valero: Aruba Refinery Would Not Be Profitable Running Today
By Naureen S. Malik Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Valero Energy Corp. is vying to sell off troubled refineries this year while looking for attractive deals to purchase additional oil and ethanol plants, executives said in a conference call with analysts Wednesday.
Valero is trying to sell its idle Aruba refinery that it admits wouldn’t be profitable if it was running today and may be able to sell its Paulsboro, N.J., refinery instead of shutting it down, executives said.
The company is pursuing a separate process for selling Paulsboro than its Delaware City, Del., refinery, which ceased operations in the fourth quarter. Last week, the company said it is negotiating the sale of Delaware City assets to an investment group headed by the plant’s former owner, Thomas O’Malley, former chief executive of Petroplus. During the conference call, executives said that they are in talks with “interested parties” for Paulsboro.
Valero pegged the book value of the Aruba refinery, which it has been trying to sell for more than a year, at $1 billion, versus $1.3 billion for Paulsboro. The Delaware City assets are valued at around $150 million. Paulsboro has the capacity to process 185,000 barrels a day and the Aruba plant’s capacity is 235,000 barrels a day. Prior to its closure, Delaware City could process 210,000 barrels.
During the bull market for commodities, these plants were raking in big profits for Valero thanks to their ability to process heavy, sour crude oil. This tougher-to-process crude traded at a wide discount to light, sweet blends of crude. However, that difference narrowed sharply during the economic downturn and those refineries started bleeding cash.
Caris & Co. analyst Ann Kohler estimates that shutting Delaware City, which was losing about $1 million a day and required $200 million in maintenance work, resulted in $1 billion in averted costs.
Tough conditions persisted for the entire U.S. refining industry, which has been plagued by inventory gluts and weak demand while oil prices more than doubled in 2009. The East Coast market is also a relatively more competitive market than the rest of the U.S. because it is well-supplied and competes against imports.
Meanwhile, Valero has been having trouble finding a buyer for the Aruba refinery. It has also been involved in a tax dispute, which the company reiterated will be settled upon final approval from the government.
“What’s happening in 2010 as far as tax structure is not that important,” Valero Chief Executive Bill Klesse said in the conference call with analysts. The tax agreement with Aruba’s government spans 20 years, so that gives the company options as it looks for a buyer, he added.
Valero has placed more than $200 million of cash in an escrow account while the dispute was in arbitration. Once the government approves the settlement, Valero will pay about $112 million in taxes and a minimum tax payment of $10 million a year as long as the company owns the refinery. Valero will continue to keep the plant’s employees on the payroll until at least June 1, 2010. However, it is unlikely that the company will restart the refinery after executives said that it wouldn’t be profitable if it was operating today.
Valero also released an updated refinery turnaround schedule to improve operations at four other refineries.
As the company seeks to sell off troubled assets and improve operations at existing facilities, Klesse said he’s keeping an eye on deals to purchase additional refineries in Europe and North America. The company may also consider buying more ethanol plants.
“We are very pleased with the ethanol business,” as a lucrative bolt-on strategy to the core oil refining operations, Klesse said. Ethanol operating income rose to $94 million in the fourth quarter from $49 million the prior quarter. The company announced acquisitions for ten ethanol plants in 2009, of which three are expected close in early 2010.
In the near-term, Valero said throughput at its oil refineries should average around 2.06 million-2.14 million barrels a day, versus 2.1 million barrels a day in the fourth quarter. Exports are expected to be lower due to lower demand from Europe that is being partly offset by greater shipments to Latin American countries such as Peru.
Valero has 14 refineries with the capacity to process 2.8 million barrels of crude oil a day.