Company News: Valero Energy agrees to buy Premcor for $8 billion

May 2, 2005
Valero Energy Corp. announced plans to buy Premcor Refining Group Inc.

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).

In other recent company news:

• Petrohawk Energy Corp., Houston, agreed to acquire Mission Resources Corp., Houston, for a combination of $135 million and 19.2 million Petrohawk common shares plus assumption of Petrohawk’s debt.

• Chesapeake Energy Corp. has agreed to acquire natural gas properties from four privately owned companies in four transactions that total $686.4 million.

• XTO Energy Inc. agreed to purchase producing properties in East Texas and northern Louisiana for $350 million from Plains Exploration & Production Co., Houston.

• A unit of Japanese refiner Nippon Oil Corp. is buying stakes in 67 Gulf of Mexico oil and gas blocks from Devon Energy Corp., Oklahoma City. Nippon declined to release the value of the transactions.

• Energy Resource Technology Inc. (ERT), a subsidiary of Cal Dive International Inc., Houston, has entered into agreements to acquire separate, 50% working interests in the Devil’s Island discovery on Garden Banks Block 344 E/2 and in the Tulane prospect on Garden Banks Blocks 114/158, both in the Gulf of Mexico.

• Amerada Hess Corp. agreed to pay $25 million for a 65% interest in Trabant Holdings International.

• State-owned CNOOC Ltd. of China said its subsidiary, CNOOC Belgium, agreed to buy a 16.69% stake in privately owned MEG Energy Corp., Calgary, for $150 million (Can.), giving CNOOC entry into Alberta oil sands acreage.

• Motiva Enterprises LLC, Houston, agreed to sell its North Petroleum Distribution Terminal in Port Everglades, Fla., one of three terminals owned and operated by Motiva in that area, to Marathon Ashland Petroleum LLC.


After closing its acquisition of Premcor, Valero would become the largest refiner in North America and the fifth largest refiner in the world (see table).

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.

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In addition, Valero will assume $1.8 billion in Premcor debt. The merger agreement gives Premcor 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 own the third largest refinery on the East Coast and the second largest refinery 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 No. 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 exist 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 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.


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

The concern, said S & P 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.


Petrohawk’s deal to acquire Mission Resources, consisting of about 60% stock and 40% cash, is expected to close in the third quarter.

The combined entity is expected to have proved reserves of 446 bcfe, 75% proved developed.

Chesapeake’s acquisition

Chesapeake will acquire the natural gas properties from Laredo Energy II LLC and its partner Pecos Production Co., both of Houston, Rubicon Oil & Gas I LP, Midland, and an independent Dallas oil and gas company that Chesapeake did not identify.

The assets being acquired are in South Texas, East Texas, and the Permian basin.

The properties include 61 MMcfed of production from 405 existing wells. Chesapeake said it is acquiring an estimated 289 bcfe of proved reserves and 277 bcfe of probable and possible reserves.

The Oklahoma City-based independent identified 276 proved undeveloped and 375 probable and possible drillsites. One deal has closed, and the other three closings are expected by May 31.

XTO acquisition

XTO expects to close on its deal with Plains E&P by May 31, with an effective date retroactive to Jan. 1, said XTO, Fort Worth.

The company estimates it is acquiring 175 bcfe of proved reserves, of which 75% are proved developed and 95% are natural gas. Initially, the acquisitions will increase XTO’s gas production by 35 MMcfd.

These properties expand XTO’s holdings in the Sabine Uplift and Cotton Valley trends. Fields include Carthage, Rosewood, White Oak-Glenwood, Beckville, East Henderson, and Oak Hill.

The predominant producing formations are the sand sequences of the Cotton Valley, Bossier, Travis Peak, and Pettit zones. XTO will operate about 60% of the value of the acquired interests.

Nippon’s gulf acquisitions

Speaking with reporters in Tokyo on Apr. 6, a spokesman said Nippon Oil Exploration USA Ltd. bought interests ranging from 12.5% to 100% in blocks off Texas and Louisiana. Nippon will operate 17 of the blocks.

In March, Nippon announced plans to invest $1.8 billion in oil and gas properties by March 2008.

On Apr. 4, Devon said it had agreed to sell almost all the noncore US properties that it previously put up for sale. Aggregate after-tax proceeds from these divestitures are estimated at $915 million.

Devon declined to disclose any of the buyers or outline terms of those transactions. The company also is divesting noncore properties in Canada and said it plans to later issue a news release concerning those properties.

ERT’s Devil’s Island deal

The Devil’s Island discovery, in 2,300 ft of water, will be developed via subsea tieback to Baldpate field facilities on Garden Banks Block 260.

The deepwater developments are operated by Amerada Hess Corp. and will be drilled this year.

ERT will pay the drilling costs and a share of the development costs to earn its 50% working interest in the field. Amerada Hess will own 40% and Newfield Exploration Co., 10%.

The Tulane prospect, in 1,200 ft of water, is a lower-risk exploration well targeting two deeper sands. The Tulane well will be produced via a subsea tieback to Garden Banks Block 72. ERT will pay a disproportionate share of the initial well cost to earn a 50% working interest, and Amerada Hess will own the remaining 50%.

Cal Dive will use its deepwater construction vessels to install the subsea tiebacks for both fields.

Amerada Hess-Trabant

Trabant Holdings owns 100% of ZAO Samara-Nafta, an exploration and production company in Russia’s Volga-Urals region.

Samara-Nafta produces 7,500 b/d of crude oil from fields in the Mamurinsky license in the southern Samara region.

Simon Kukes, former CEO of Tyumen Oil Co. and OAO Yukos, is the CEO of Samara-Nafta.


MEG Energy owns 100% interest in oil sand leases covering 32,900 acres with estimated potential of 2 billion bbl.

“This move provides a good chance for us to exploit the advanced technology and expertise of oil sand development,” said CNOO Chairman and CEO Fu Chengyu. “These skills may help facilitate the exploitation of oil sand and shale in China, where large reserves of oil sand and shale were found in recent years.”

Marathon’s terminal deal

Terms of Marathon’s terminal acquisition were not disclosed.

Motiva’s North Terminal has been in operation since 1940 and has a storage capacity of 388,000 bbl.

Company officials said Motiva “can effectively supply the same market from our other two company terminals located in the port,” with combined storage capacity in excess of 1.1 million bbl.

The sale is expected to close in early June and will not result in any supply disruption to Motiva customers, said company officials.

Marathon is expected to assume control of the terminal upon final closing.