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Valero Earnings fall & Aruba/Refineries on Block

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This topic contains 2 replies, has 1 voice, and was last updated by  Charles Randall 13 years, 11 months ago.

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  • #3874

    Charles Randall
    Participant

    Valero net falls and puts refinery on block
    Tue Nov 6, 2:10 PM ET

    NEW YORK (Reuters) – Independent refiner Valero Energy Corp (VLO.N) said on Tuesday its quarterly earnings fell 20 percent, but its shares rose on news it was considering selling its Aruba refinery. That refinery, with processing capacity of 285,000 barrels per day, does not produce gasoline, the company said, and has suffered power outages that would require Valero to spend heavily to upgrade the plant.
    A large capital investment is required to make this competitive in the long run, thus we have decided to look at our strategic alternatives,” Chairman and Chief Executive Bill Klesse told a conference call. A sale of the Aruba plant could bring $2.5 billion to $3.0 billion, according to a Bank of America note to investors.
    Net income in the third quarter fell to $1.27 billion, or $2.09 a share, from $1.60 billion, or $2.55 a share, in the year-ago period. Excluding items, the company posted quarterly earnings from continuing operations of $1.40 a share. On that basis, the earnings beat the analysts’ consensus forecast of $1.35 per share, according to Reuters Estimates.
    Analysts had sharply cut their forecast for the quarter last month from $2.01 per share after the company’s October warning that its earnings would fall to between $1.30 to $1.40 per share.Revenue in the quarter rose to $22.5 billion from $21.0 billion.
    Valero sold its Lima, Ohio refinery to Canada’s Husky Energy (HSE.TO) for $1.9 billion earlier this year as part of a review of its assets.
    The sale dropped the company’s total refinery capacity to slightly below 2.2 million barrels per day, behind the No. 1 refiner ConocoPhillips (COP.N). The company also announced it would proceed with the expansion of its St. Charles refinery that would increase its capacity to produce ultra low sulfur diesel.
    Valero’s shares were up 4.3 percent to $72.39 per share on the New York Stock Exchange, outpacing the 2.3 percent rise in the Standard & Poor’s Energy index (.GSPE).
    Valero had warned investors in October that its third quarter earnings would fall short of expectations as the run in crude oil prices to record levels squashed its refining margins, and it said on Tuesday the current quarter remained tough.
    The sharp contraction in refining margins from the record levels reached in the second quarter have eroded earnings at all the major U.S. refiners as crude oil prices rallied versus the prices in gasoline and other products.
    “So far in the fourth quarter, the margin environment has been difficult as prices for refined products have failed to keep pace with the increase in feedstock costs,” Valero’s Klesse said.
    But margins had improved in recent days with diesel fuel a rare bright spot, he added.

  • #7171

    Charles Randall
    Participant

    Valero is looking at selling its Aruba Refinery (currently shown de-rated slightly to 285,000 BPD capacity) because of power supply (which would only take a Petcoke Gasifier / Cogen to solve) and although this article claims does not produce gasoline – it is wrong, Valero’s CEO had said that gasoline wouldn’t make US spec’s. Valero is Aruba’s primary source of gasoline and diesel as well as the two airport’s jet fuel. But Aruba does produce a lot of intermediate refinery products and Bunker / fuel oils that Valero upgraded & used to eliminate 3rd party purchases from its US Gulf Coast refineries.
     
    The purchased capacity of Aruba for Valero was 315,000 BPD (actual capacity seldom ran above 240 MBD due coker downtime) and it paid total $675 million (less ~$2150/BPD capacity) and then spent another $670 million to upgrade/revamp the coker capacity, crude capacity and other downstream units (so total would be $1.345 billion or $4270/BPD capacity). The stated replacement capacity was estimated to be worth $2.4 billion at the time of its purchase in 2004 which was at very low end of capacity cost ~$8000/BPD. Valero had purchased (hence bragging rights) all of Premcor’s refineries for an average less than $9,000 BPD capacity that ranged from 10-40% of a refinery replacement value. It is not surprising therefore that Valero has been sorting through its operations to capitalize on today’s high expansion cost that range from $22,400 – 24,000/BPD capacity and avoid both expansion cost and lost revenue for accidents and shutdowns. Especially for those refineries like recently sold Lima that required large & expensive upgrading (Lima sold for $1.9 billion or ~$11,800/BPD capacity for the 161 MBD sweet crude refinery but the $1.0-1.5 billion investments to expand crude & coker for Canadian Bitumen take it to full $22k/BPD capacity replacement cost).  It would appear that these similar evaluations have Valero management looking at Aruba and the other 4-5 refineries up for consideration.  
     
    But my thoughts would be that the expansion value greatly understates true value of refining capacity in a country where Environmentalist control EPA outcomes & make new Greenfield refineries impossible to build – and so there isn’t a real value for irreplaceable capacity.  Aruba doesn’t quite fit under this since it is one of two Caribbean coking refineries – but it has significant future opportunity and would be better suited to partial divesture or tolling approach for crude producer – Petrobras comes to mind (since they recently bought Japanese refinery & the Crown Houston coking refinery).  There is nasty overhang with Aruba tax as I remember – the refinery has tax exemption for Valero until 2011 and then jumps back to 28% level – perhaps this is part of negotiating strategy as well?  
     
    One last note Valero had noted an earnings opportunity of $1 billion over next 5 years from increased safety/operating focus and keeping refineries up and operating and by avoiding safety/fire incidents. The Valero fire this year was said to represent some $586 million from lost sales in 2007.
     
    Regards
    Charlie Randall

  • #7170

    Charles Randall
    Participant

    My Valero contacts reminded me that Aruba doesn’t have any downstream gasoline units (FCC, Reformer, ect) so it Doesn’t make gasoline – most of it is imported. So despite having a visbreaker & coker this is not a complex refinery per sea. And so whoever buys this refinery will need to add these units – and have them capable of making product at Low Sulfur fuels spec.
    Regards

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