Analysts say Valero lease deal for Corpus Christi refinery key move

Valero Energy Corp., San Antonio, Tex., has agreed to lease -- with purchase options -- El Paso Corp.'s 115,000 b/d Corpus Christi, Tex., refinery. Valero plans to integrate the refinery with its existing plant nearby to create the fifth largest US refinery.


Paula Dittrick
OGJ Online

HOUSTON, June 4 -- Three analysts Monday said Valero Energy Corp., San Antonio, Tex., was making a key strategic move by signing a lease purchase option for El Paso Corp.'s 115,000 b/d Corpus Christi, Tex., refinery.

That refinery is less than 1 mile from a 94,100 b/d Valero refinery.

"For all practical purposes, they own the refinery," Fadel Gheit, analyst for Fahnestock & Co. in New York, said of Valero's position on the El Paso refinery. "The driving force is economy of scale."

Gheit predicted that Valero will continue acquiring refineries in coming years until it ends up becoming the largest independent refining company worldwide.

The El Paso refinery is the second planned acquisition in as many months. Last month, Valero announced plans to acquire Ultramar Diamond Shamrock Corp., San Antonio, Tex. (OGJ Online, May 10, 2001). The resulting combined Valero-UDS will double Valero's size by merging 23,000 employees, 13 refineries, and 5,000 retail outlets in North America.

Also on Monday, Valero said it expects to earn more than $4/share in the second quarter, up from its initial forecast of from $3.25-3.75/share and compared with last year's second-quarter earnings of 95¢/share.

For this entire fiscal year, Valero said it expects to earn $10/share.

In the El Paso deal, Valero agreed to 20-year capital leases with purchase options after 2 years for El Paso's Corpus Christi refinery and product logistics system, acquired by El Paso after its acquisition of Coastal Corp. earlier this year (OGJ Online, Jan. 29, 2001).

Valero will pay $18.5 million/year for the first 2 years and have the option to purchase the assets for $294 million at the end of the second year. It has already paid $105 million for inventories and working capital.

Valero plans to invest $52 million over 3 years to integrate the two refineries and increase the combined throughput capacity to 380,000 b/d, making it the fifth largest US refinery. It also plans to reduce costs, saving $20 million within 3 years.

The lease agreement stemmed from accounting rules governing what percentage of assets El Paso can divest within 2 years of its acquisition of Coastal. El Paso acquired Coastal under pooling of interest accounting.

John Meloy, Simmons & Co. International Inc. downstream and midstream analyst, praised Valero's acquisition of pipeline assets along with the refinery.

With the transaction, Valero is acquiring the 100,000 b/d Houston Pipeline System, the 20,000 b/d San Antonio Pipeline System, and the 32,000 b/d Valley Pipeline system, and associated terminals.

"Strategically, that is an outstanding move for them to get those pipelines. They can send product from Corpus Christi to Houston via pipeline rather than pay a barge," Meloy said.

Valero already was using 65% of the Houston Pipeline System, and now it will cut those pipeline costs 50% by leasing-owning that pipeline, Meloy said.

Bill Greehey, Valero's chairman and CEO said, "The refinery has significant upgrade potential. So we will be investing in strategic projects to fully integrate this refinery into our existing operations, enable it to process heavier feedstocks, increase its throughput capacity, and upgrade its product yields."

About 70% of the El Paso refinery's production is light products, including conventional gasoline, diesel, jet fuel, petrochemicals, propane, butane, and light naphthas. The refinery also produces multiple grades of asphalt and petroleum coke.

Among the capital projects planned is one to convert El Paso's underutilized visbreaker unit to process 75,000 b/d of sour crude for resid upgrading in Valero's existing refining system and fully utilizing the aromatic extraction units to recover additional Valero aromatics.

Louis Gagliardi, John S. Herold Inc. analyst, said Valero will benefit from buying leverage because it will have two Corpus Christi refineries able to process imported heavy crude.

The pipeline portion of the deal also gives Valero added flexibility, Gagliardi said. "It provides an outlet for their product and that gives them a lot more marketing potential."

Greehey also said the logistics of the pipelines will provide "tremendous benefits ... These assets are going to be very profitable for Valero because we're reducing our costs while increasing our income opportunities. The pipeline system provides low-cost access to major U.S. markets, reduces our product transportation costs, and lessens our dependency on marine transportation," Greehey said.

The terminals also enhance Valero's marketing flexibility and profitability, Greehey said.

Contact Paula Dittrick at paulad@ogjonline.com

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