Valero Energy Corp.'s $895 million-plus purchase of ExxonMobil Corp.'s Benicia refinery and 340 marketing outlets in California marks the San Antonio independent refiner's entry into retail operations, along with a major geographic diversification of its business.
The Benicia refinery is one of the best-maintained and most complex refineries in the US, with a replacement value of $2 billion and a potential for upgrade, said Valero officials.
The acquisition will significantly strengthen Valero's refining and marketing position, said Bill Greehey, company chairman and CEO. The company is already the second-biggest independent US refiner, with five refineries in Texas, Louisiana, and New Jersey.
"The retail business is a natural growth area for Valero, because retail margins tend to be countercyclical to those in refining," Greehey said. "Our strategic plan has been to enter the retail business through a major acquisition where we could also acquire an experienced management team in place."
Assets details
The 130,000 b/d capacity refinery is located just north of San Francisco. It is a high-conversion refinery capable of processing heavy crudes. Nearly 70% of its output is gasoline, primarily the cleaner-burning California Air Resources Board-specification fuel required for the California market, which typically sells for substantial premiums above US Gulf Coast prices. Another 16% of the refinery's production is low-sulfur diesel and jet fuel, which also generally sell for premium prices.
The marketing portion of the acquisition involves all of the Exxon-branded stations in California. Of those, 80 are company-owned-including 75 in the San Francisco Bay area-with 10 company-operated and 70 leased to dealers. The other 260 sites throughout California are independently owned and operated.
For the next 10 years, Valero will retain exclusive rights to the Exxon brand name in California, except in the Bay Area, where Federal Trade Commission and California officials are requiring the Exxon brand be withdrawn by mid-June.
The FTC required Exxon to sell the Benicia refinery, 2,431 service stations, and other assets as a condition of its merger with Mobil last year. Exxon also signed a consent decree with California officials mandating the sale of the refinery and stations in that state. In December, the newly merged ExxonMobil sold 1,740 stations in Northeast and Mid-Atlantic states to Tosco Corp. The company retains Exxon's Torrance, Calif., refinery, however.
California officials have long been trying to encourage a new refiner to enter that market, the world's third largest, in hopes that increased competition would drive down the state's pump prices for gasoline. Gasoline prices surged to $1.80/gal last summer after fires at two California refineries.
But financial analysts say Valero's entry isn't likely to drive down gasoline prices in California.
Valero strategy
Valero will introduce a new retail brand of gasoline in California in mid-June.
Company officials have completed site audits, and market research "shows that California consumers are eager to have an alternative to traditional retailers," said Greehey. "We plan to mount an aggressive advertising and promotional campaign to introduce the Valero brandellipseWe plan to meet or exceed the level of brand support that Exxon distributors received in the past."
The company plans to finance the transaction through a combination of debt, equity, and off-balance-sheet financing, including issuing $250-350 million of both common and preferred convertible stock. That will weaken the company's current credit profile and increase its debt-to-capital ratio to 50% from about 42% presently, analysts said. Added to that will be the cost of establishing the Valero brand in the competitive California market.
Although the acquired facilities have historically provided strong cash flows, analysts said Valero likely will be forced to maximize refining profit margins. Because the Benicia refinery has been a major supplier of fuel to the spot market, that could drive up prices, they said.
Valero officials say they plan a moderate pricing strategy similar to Exxon's previous levels. About 75% of the refinery's gasoline production and 90% of its distillate will be sold on an unbranded basis to commercial customers, with the remainder committed to branded retail operations.
In addition to the base price of $895 million, Valero will pay for inventories and working capital based on market-related prices at closing. As part of the agreement, Valero also signed a long-term supply agreement with ExxonMobil for up to 100,000 b/d of Alaska North Slope crude.
The acquisition is expected to close by June 15, pending final approval by the FTC and the California attorney general's office. It is expected to be immediately accretive to Valero's earnings at more than 50¢/share, Greehey said. The company will reduce its debt ratio down to present levels within a year, he said.
In the bidding for the ExxonMobil downstream operations, Valero beat out Ultramar Diamond Shamrock, which has a refinery in Wilmington, Calif.
