Valero Energy Poised to Grow With an Overseas Shopping Spree
Valero Energy (VLO), the major U.S. refiner that was shutting down some of its operations and laying off workers just a year ago, is now preparing for an overseas shopping trip. And it makes sense, considering that demand for fuel in the U.S. has remained rather shaky while exports to Europe, especially diesel fuel, continue to rise. In short, Valero is following the demand, and right now it's not in the U.S.
Valero, which reported its third-quarter earnings Tuesday, ended the quarter with $2.4 billion in cash. Valero will tap some of those funds to buy refineries overseas and is "actively looking," especially in the UK, CEO Bill Klesse said Tuesday in an investor conference call and webcast. The company's focus on economic growth is expected to continue into 2011, with a capital spending budget of $2.6 billion, some of which will be focused on acquisitions.
Valero's turnaround couldn't have been timed better. For one, Europe is a large market and its demand for diesel is rising. Valero has been exporting diesel for some time now. And as Klesse noted, the quality of assets currently for sale in Western Europe is much better than what they've previously seen. The company expects more to come to market as the big oil majors, like Exxon (XOM), Shell (RDS) and Total (TOT) begin to question the integrated business model. Several major integrated oil companies have sold off its refining and marketing business segments to focus solely on exploring for and pumping oil and gas.
The distance that Valero has traveled, from a company that reported four straight quarters of income loss to a business that, as of today, can log two consecutive quarters of profits, is worth noting. Valero's turnaround is due, in large part, to an improvement in the overall refining environment. Most importantly, the margin, or crack spread, between the cost of oil and price of refined fuels, widened 55 percent to $7.87 a barrel from the same period last year. Higher margins for diesel has been especially helpful in boosting profits in second and third quarters.
And Valero benefited from steeper discounts in heavy, sour crude -- its core business. The process of refining heavy, sour crude into fuel products such as gasoline is difficult. But Valero has made a bundle off this approach in the past because it has the infrastructure and was able to buy these oils at discount and sell the refined products at a well-padded margin. That is, until last year when suppliers of heavy grades of crude pulled their product off the market due to slow demand for fuel. The limited supply erased the discounts and Valero saw its well-padded margins disappear. Those discounts have returned and Valero is once again making money.
Valero deserves some credit for its return to profit too. The refiner has cut costs-- some $140 million in year-to-date -- and has plans to hit $185 million in reductions by the end of 2010. Valero also has sold several money-losing or ill-fitting assets including its Delaware refinery to a subsidiary of PBF Energy for $220 million. Valero has agreed to sell another refinery to PBF Energy, a partnership backed by private equity firm Blackstone Group and First Reserve Corp. Valero also announced this week plans to sell its 50 percent indirect equity interest in the Cameron Highway Oil Pipeline for $330 million in cash.
Photo from Flickr user tinao bao, CC 2.0
Related: