Valero Energy agrees to buy Premcor for $8 billion

By OGJ editors
HOUSTON, Apr. 25 -- Valero Energy Corp. announced plans to buy Premcor Refining Group Inc. and its four refineries for $8 billion. Upon closing, Valero would operate 19 refineries with crude capacity totaling 2.7 million b/cd, according to Oil & Gas Journal's latest Worldwide Refining Survey (OGJ, Dec. 20, 2004, p. 46).

It would become the largest refiner in North America and the fifth largest refiner in the world.

The boards of both companies unanimously approved the acquisition, which must be approved by Premcor shareholders and regulators.

Premcor's assets are a 175,000-b/cd, high-conversion refinery of heavy, sour crude in Delaware City, Del.; a 190,000-b/cd, high-conversion refinery of sweet crude in Memphis, Tenn.; a 237,500-b/cd refinery of heavy, sour crude in Port Arthur, Tex.; and a 165,000-b/cd refinery of sweet crude in Lima, Ohio.

The Lima plant would give Valero, based in San Antonio, entry into the upper Midwest market. Closing is expected by Dec. 31. Premcor is based in Old Greenwich, Conn.

Terms call for the deal to be paid 50% in stock and 50% in cash. Upon closing, Premcor shareholders are to receive 46.7 million share of Valero stock, worth $3.5 billion as of Apr. 22, and $3.4 billion in cash.

In addition, Valero will assume $1.8 billion in Premcor debt. The merger agreement gives Premor shareholders the right to receive 0.99 share of Valero common stock or $72.76 for each Premcor share, or a combination of the two.

Valero Chairman and CEO Bill Greehey told reporters and analysts during an Apr. 25 conference call that he expects the US Federal Trade Commission to approve the acquisition.

Valero can call off the deal if the FTC required it to make any divestitures as a condition of approval. Valero has yet to discuss the matter with FTC officials.

"We feel confident that the FTC should approve this," Greehey said, adding that Valero would be the third largest refiner on the East Coast and the second largest refiner on the Gulf Coast.

Prudential Equity Group LLC analyst Andrew F. Rosenfeld of New York said he was "cautiously optimistic the deal can be approved without major political hurdles or interference."

Given high gasoline prices going into the summer driving season, Rosenfeld said investors should be aware that political factors might come into play.

Rosenfeld expects few reguatory concerns from the FTC based upon an analysis of the specific market that each refinery serves.

"Under our 2004 Refining Capacity Survey data, we estimate that the new Valero would not hold the number 1 market share positions in any US region," Rosenfeld said.

Conversion capacity
The acquisition will increase Valero's capacity to process heavy, sour crude oil, which sells at a discount to light, sweet crude.

"We will have the most conversion capacity of any US refiner," Greehey said. "Of course, the more conversion capacity that you have, the heavier and more sour feedstocks you can run, and the more gasoline and diesel you can make, which allows you to capture better margins."

Valero expects to be able to process more than 1,000 b/d of Mexican Maya and Maya-type crudes by 2007, he said, noting that strategic opportunities existing in both Valero and Premcor systems to increase sour crude processing.

Premcor, in a study with EnCana Midstream & Marketing, Calgary, is examining the feasibility of expanding Premcor's 170,000-b/d Lima refinery and configuring it to process heavy crude from EnCana's oil sands in northeastern Alberta (OGJ, Dec. 6, 2004, p. 9).

Greehey praised the Premcor-EnCana study, calling it "smart." He said Valero's leverage to sour crude discounts is boosting the company's earnings.

As oil demand grows, incremental crude supply is increasingly heavy and sour. Oil of that type makes up about 70% of Valero's crude slate, Greehey said.

Reaction
Standard & Poor's Rating Services lowered its corporate credit rating on Valero Energy and will monitor the company's creditworthiness.

The concern, said analyst John Thieroff, is that "refining margins could weaken considerably in advance of the close, jeopardizing Valero's plans for rapid deleveraging."

Thieroff said, "Additional sizable acquisitions in the near term, unless funded with a very large component of equity, would likely trigger a downgrade as would significant share repurchases done in advance of material deleveraging."

A number of factors, including potential lower commodity prices or slowing oil demand, could result in lower refining margins, Thieroff said, adding that Valero is counting on high margins for some time.

"We are not forecasting that the bottom of the cycle is going to happen next year," he said, adding that his intention was to take a "measured" approach to Valero's debt in case the market changed.

IRG Research analyst Ann Kohler of New York said she believes fundamentals for the refining sector remain "outstanding," particularly for companies like Valero that can process less expensive sour and heavier grades of crude oil.

She said the FTC's biggest concern regarding the Premcor acquisition could be the Delaware City refinery because Valero already has a 166,000 b/cd refinery in Paulsboro NJ.

"That could be a deal breaker," if the FTC asked Valero to divest the Delaware City refinery, Kohler said.

Related Articles

WAFWA: Aerial survey finds lesser prairie chicken population grew

07/06/2015 A recent range-wide aerial survey found the lesser prairie chicken population rose 25% from 2014 to 2015, the Western Association of Fish & Wil...

Production ramps up from Sunrise oil sands project

07/06/2015 Husky Energy Inc., Calgary, reported that 25 well pairs are now on production at its Sunrise oil sands project in northeastern Alberta. Steaming is...

South Africa’s Enref refinery due maintenance

07/06/2015 Engen Petroleum Ltd. will shut down its 125,000-b/d Enref refinery in Durban, South Africa, for planned maintenance beginning on July 9, the compan...

Buru awarded onshore Canning licenses

07/06/2015 Buru Energy Ltd., Perth, and Mitsubish Corp. have been granted two production licenses for Ungani oil field in the onshore Canning basin of Western...

Cenovus sells royalty business for $3.3 billion

07/06/2015 Cenovus Energy Inc., Calgary, inked an agreement to sell its wholly owned subsidiary Heritage Royalty LP to Ontario Teachers’ Pension Plan for gros...

CERI: Energy, operational efficiencies possible in Canadian oil, gas

07/06/2015 Measures can be taken by operators in the expanding resource-intensive Canadian oil and gas sector to improve both energy efficiency and operationa...

AGL Energy to scale back upstream gas operations

07/06/2015

Gas retailer AGL Energy Ltd., Sydney, says it will exit the oil business and massively scaling back its upstream gas operations.

Macondo settlement seen ‘positive’ for BP

07/06/2015 BP Exploration & Production Inc.’s recent agreement to settle federal and state claims related to the 2010 Macondo blowout and spill improves t...

Nelson-Farrar Quarterly Costimating Indexes for selected equipment items

07/06/2015 The Nelson-Farrar refinery construction index rose to 2,475.6 by December 2012 from 2,467.4 in January of the same year. The index continued to ris...
White Papers

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by
Available Webcasts


The Resilient Oilfield in the Internet of Things World

When Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.

register:WEBCAST



On Demand

Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors

register:WEBCAST


Driving Growth and Efficiency with Deep Insights into Operational Data

Wed, Aug 19, 2015

Capitalizing on today’s momentum in Oil & Gas requires operational excellence based on a clear view of what your business data is telling you. Which is why nearly half* of oil and gas companies have deployed SAP HANA or have it on their roadmap.

Join SAP and Red Hat to learn more about using data to drive process improvements and identify new opportunities with the SAP HANA platform running on Red Hat Enterprise Linux. This webinar will also show how your choice of infrastructure impacts the performance of core business applications and your ability to achieve data-driven insights quickly and reliably.

*48% use SAP, http://go.sap.com/solution/industry/oil-gas.html

register:WEBCAST


OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected