Premcor acquisition makes Valero North America’s largest refiner

June 1, 2005
Valero Energy Corp., a Fortune 500 company based in San Antonio, is set to acquire Premcor Inc. in an $8 billion transaction.

Valero Energy Corp., a Fortune 500 company based in San Antonio, is set to acquire Premcor Inc. in an $8 billion transaction. “This transaction is one of the largest and most strategic acquisitions in Valero’s history,” remarked Bill Greehey, Valero chairman and CEO, after the announcement. The megamerger is still subject to shareholder and regulatory approval, but officials expect a completion date of Dec. 31.

The $8 billion price tag is comprised of 46.7 million shares of Valero stock, valued at roughly $3.5 billion, and $3.4 billion financed with cash and bank debt. Valero also assumes $1.8 billion in Premcor’s existing debt.

Before the merger announcement, Valero reported record net income of $534 million, or $1.92 per share, for the first quarter of 2005 - more than double last year’s first quarter net income of $248 million.

This Corpus Christi (Tex.) refinery is one of 19 Valero will own and operate after the Premcor acquisition receives approval. Photo courtesy Valero Energy Corp.
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The merger puts Valero at number 15 on the current listing of the Fortune 500, with assets of $25 billion and annual revenues of nearly $70 billion. Adding to Valero’s lineup will be Premcor’s refineries in Port Arthur, Texas, Memphis, Tenn., Delaware City, Del., and Lima, Ohio, increasing the company’s total number of refineries to 19. Greeney adds, “We are acquiring several very strategic refineries for significantly less than their combined replacement value, and we’ll be improving the profitability of these plants by capturing synergies, improving their reliability and yields, and increasing their capacities.” Valero stands to add 790,000 barrels per day (BPD) to its system, making it the largest refiner in North America.

Premcor is an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke, and other petroleum products in the United States.

Standard & Poor’s did not react favorably to the acquisition announcement. The ratings service lowered Valero’s corporate credit rating to “BBB-” from “BBB” and placed the rating on CreditWatch with negative implications. On the other hand, the ratings service gave Premcor a “BB-” corporate credit rating and placed the rating on CreditWatch with positive implications.

Lehman Bros. Inc. served as financial advisor to Valero, and Morgan Stanley acted as financial advisor to Premcor.

EIA expects oil prices will remain near $50/bbl, monitors Chinese demand

Guy Caruso, administrator for the US Department of Energy’s Energy Information Administration (EIA), told the Kyodo News that oil prices may decrease in the future, but said to expect them to remain near $50/bbl for the next few years.

However, this short-term outlook may change due, in part, to the uncertainly of China’s demand. Reliable information about what’s happening there is hard to come by. China’s economy has been growing rapidly in terms of output of goods and services. The country showed a 20 percent increase in oil demand, one million b/d, in 2004. The uncertainty about China’s 2005, 2006, and 2007 economy therefore limit the prediction of crude oil prices in the coming years.

As for long-term predictions, Caruso said prices are expected to come down to $27/bbl to $35/bbl with investments to boost production, refining, and delivery capacity. He also said he hopes long-term partnerships and solutions to geopolitical problems will lead to industry improvements.

Caruso said the demand for oil in world markets is high and that the industry is currently operating at 98- to 99-percent capacity, with only about one million b/d in unused oil.

Dynegy ends legal fight with shareholders over alleged securities violations

Dynegy Inc. has reached a comprehensive settlement agreement related to the shareholder litigation brought by the regents of the University of California. This class-action suit in US District Court in Houston alleges a violation of securities laws primarily related to “Project Alpha,” a structured natural gas transaction entered into by Dynegy in 2001.

The settlement states that Dynegy is to pay $468 million and elect two new qualified directors to the board from a list of not less than five candidates submitted by the regents. The $468 million includes $150 million covered by the company’s director and officer insurance policies, a $250 million cash payment, and $68 million in Class A common stock to the class represented by the regents.

In a related case, two plaintiffs made similar claims and Dynegy has agreed to settle the litigation on the basis of corporate governance changes. The company has agreed to pay related attorney fees and expenses totaling $5 million.

There were no findings of any violation of federal securities laws. The regents were represented by Lerach Coughlin Stoia Geller Rudman & Robbins LLP. Dynegy was represented in litigation by Haynes & Boone LLP and in the settlement by Stonebridge International LLC and Hogan & Hartson LLP.

Galaxy Energy updates coalbed Methane production in Powder River basin

Denver-based Galaxy Energy Corp.’s natural gas production from its Powder River basin (PRB) coalbed methane (CBM) project now exceeds 1.1 MMcf/d from 37 partially dewatered wells. As dewatering continues and additional wells are put on-stream, production is expected to rise.

One hundred fifty seven coalbed methane natural gas wells on its PRB properties are completed, and another 67 are in various stages of completion. Thirty-four additional completed wells commenced testing and dewatering, and 31 are expected to deliver gas in the next few weeks. Galaxy recorded natural gas sales revenues of $111,877 on sales volumes of 28.9 MMcf, compared to zero sales revenues and volumes in the same period in 2004.

Galaxy Energy’s coalbed methane well count in the Powder River basin (shown here) now exceeds 200. Dewatering is continuing as more wells go on-stream. (Photo courtesy Galaxy Energy Corp. and Bill Cooley/Cooley Images.)
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The project includes the following pipelines: Glasgow and West Recluse - Campbell County, Wyo.; Pipeline Ridge - Sheridan County, Wyo.; Letier & Ucross Ranch - Sheridan County, Wyo.; and Kirby Project - Big Horn County, Mont.

Petrosearch Energy sells stock, will use proceeds to expand drilling

Petrosearch Energy Corp. has sold $12.6 million of its common stock in private offerings to the tune of $11.9 million to be used for general corporate purposes, including the drilling of projects in the company’s inventory. Sterne, Agee & Leach Inc. served as placement agent for $10.6 million of the offerings which were sold at $1.30 per share to a group of accredited investors consisting of US-based investment funds.

Petrosearch, a Nevada corporation with executive offices in Houston, finds and develops oil and gas reserves across the US. The company is currently active in Texas, Oklahoma, North Dakota, Montana, Alabama, and Mississippi.

Petroleum Place Energy reorganizes after acquiring Calgary’s Tristone Capital

Petroleum Place Energy Advisors Inc. has closed its previously announced acquisition of Tristone Capital Inc., an investment banking firm specializing in the energy industry. The transaction includes Tristone Capital Advisors Inc., Tristone Capital Inc.’s parent company, along with the Tristone operating subsidiaries in a cash and share transaction valued at approximately US $81 million (Can. $101 million).

Petroleum Place will change its name to Tristone Energy Services Inc. and will become the holding company of two primary operating organizations: Calgary-based Tristone Capital Inc. and Houston-based P2 Energy Solutions Inc.

Gary Vickers will serve as chairman and CEO of Tristone Energy, while George Gosbee will serve as president of the company. Gosbee will continue his role as chairman, CEO, and president of Tristone Capital.

CyrusOne expands, primary data center, opens second facility in North Houston

Houston-based CyrusOne [see “Outsourcing IT,” April 2005 OGFJ] has expanded its primary data center and set up a second in the Greenspoint (North Houston) area. The company has increased its capacity in keeping with the trend of outsourcing managed IT services such as data security, data storage, network and systems administration, business continuity, and disaster recovery.

The expanded flagship data center gives customers access to more space, and the new center in the Greenspoint area provides mirrored operations for companies to house operations in two facilities, as well as convenience for those operating in North Houston.

CyrusOne provides core IT infrastructure, from high-density power and cooling to managed IT services and enterprise level managed hosting, using an outsourced model.

Energy Transfer Partners to build pipeline connecting Bethel storage to Texoma facility

Dallas-based Energy Transfer Partners LP has approved the construction of an 85-mile, 36-inch pipeline to extend from its Bethel gas storage facility in Anderson County, Tex., to its 30-inch Texoma Houston Pipe Line facility in Rusk County, Tex. Approximately 22,500 horsepower will be installed at several locations along the new pipeline and the existing Texoma Pipeline to move substantial volumes of natural gas to multiple market outlets.

This project is the first of a multi-phase expansion intended to provide producers in the Bossier Sand and Barnett Shale basins in East and North Texas an outlet to various markets throughout Texas and the US. The new line is expected to be in service in one year, while the entire project will require 18 to 24 months to complete.

This expansion will continue the integration of the company’s 36-inch Katy Pipeline and the Southeast Texas Pipeline assets with the TUFCO system previously purchased in June 2004 and the Houston Pipe Line system and related storage facilities purchased in January 2005. IT will connect those pipeline systems and provide producers with transportation service from every major natural gas producing area in Texas to the major market hubs.

The pipeline is anticipated to cost about $132 million. Additional pipelines planned as part of this expansion are expected to cost an additional $270 million. The construction costs will be partially financed with internally generated funds.

Pioneer’s Canadian subsidiary to sell non-strategic properties

The Canadian subsidiary of Pioneer Natural Resources Co., an independent oil and gas exploration and production company based in Dallas, has signed a definitive agreement for the sale of its Martin Creek, Conroy Black, and Lookout Butte oil and gas properties to Ketch Resources Ltd. for proceeds of approximately $207 million.

As of March 1, the properties’ net proved reserves were estimated to be approximately nine million boe, producing 3,000 boe/d.

Tristone Capital acted as financial advisor for the transaction, with TD Securities as lead strategic advisor and Scotia Capital as strategic advisor.

Pioneer will retain its core areas in Canada, the Chinchaga natural gas and the Horsehoe Canyon coalbed gas fields.

Kerr-McGee settles with Icahn and JANA

Oklahoma-based Kerr-McGee has entered into a settlement with shareholder activist Carl Icahn and JANA Partners LLC, a $2 billion hedge fund with offices in New York City and San Francisco, to dismiss the complaint with prejudice that was filed March 10 in the US District Court for the Western District of Oklahoma.

Kerr-McGee has enhanced stockholder value with its separation from its chemical business and the $4 billion share repurchase program in the form of a modified “Dutch Action” tender offer. With this, it has received written notice from the Icahn group and JANA confirming that they will immediately cease proxy solicitation activities. The Icahn group and JANA will withdraw their alternate board nominees from consideration for election to the Kerr-McGee board of directors on successful completion of Kerr-McGee’s repurchase program.

Energy Partners, Object Reservoir ink deal to evaluate portfolio assets

New Orleans-based Energy Partners Ltd (EPL) has contracted with Object Reservoir Inc. to evaluate multiple assets in their exploration and development portfolio during 2005. The agreement calls for Object Reservoir, a technology company focused on dynamic reservoir characterization, to assist EPL by employing their services, the results of which may influence such development decisions as well placement, completion design, and facility requirements, in addition to providing insight for future lease acquisitions.

EPL is an independent oil and natural gas E&P company with operations focused along the Gulf Coast, both onshore in South Louisiana and offshore in the shallow to moderate depth waters of the Gulf of Mexico shelf.

Object Reservoir, headquartered in Houston, provides its clients with early, actionable reservoir knowledge that enables them to make smart decisions sooner, thus improving their economic performance.

Cano Petroleum gets approval for AMEX listing

Fort Worth-based Cano Petroleum Inc. has received approval from the American Stock Exchange to list its common stock for trading. Assuming completion of final filings, fees, and adherence to applicable listing standards, Cano will begin trading on the AMEX under the symbol CFW by the end of May.

Cano retained Cohen Specialists LLC as specialists in trading CFW shares.

Cano Petroleum is an independent energy producer with properties in the mid-continent region of the US. The company’s primary focus is on increasing domestic production from proven fields using enhanced recovery methods. Cano will continue to trade under the ticket symbol CAOP on the NASD bulletin board until the transition to AMEX is complete.

FMC Technologies signs $350 million in supply deals, will develops compact separation system with NATCO

Houston-based FMC Technologies Inc. has been awarded several contracts for supply subsea equipment. First, the company has been chosen for Petrobras’ Golfinho and Piranema fields in offshore Brazil. The total value of the contracts to FMC is approximately $30 million in revenue. The scope of supply for Petrobras includes 13 subsea trees designed for service in 6,562 feet of water.

The company has also been chosen to supply subsea systems for the ChevronTexaco-operated Agbami project in offshore Nigeria. The contract with Star Deep Water Petroleum Ltd., an affiliate of ChevronTexaco Corp., has a value of approximately $276 million in revenue to FMC. This project includes 22 subsea trees and associated structures, manifolds, and production control systems.

Finally, FMC has signed a deal with Woodside Energy Ltd. to supply subsea systems for the Perseus-over-Goodwyn (PoG) project, offshore Western Australia. The contract value is about $44 million. The PoG project includes four subsea trees, production controls, and associated equipment.

In other news, FMC has signed a technology advancement agreement with NATCO Group Inc. for development of a next-generation compact liquid/liquid separation system. The agreement will combine FMC’s compact, cyclonic separation technology with NATCO’s electrostatic coalescer technology to develop a new compact separation system for subsea and surface processing applications.

The initial application for the system will be in subsea separation processing studies being conducted for Petrobras by FMC. The studies involve the exploration of different subsea separation concepts and construction of a prototype separator for Petrobras’ requirements. FMC will market the system for subsea and surface applications, while NATCO will market it for surface applications.

Petris establishes partnership with FileNet, expands enterprise content capabilities

Houston-based Petris Technology, which provides vendor-neutral information management technologies and services, is partnering with FileNet, a provider of enterprise content and business process management solutions with headquarters in Costa Mesa, Calif.

This partnership expands the capabilities of Petris Professional Services to address client needs for enterprise content management, while complementing Petris’ existing technology offerings.

As a member of FileNet’s partner program, Petris can offer both FileNet consulting and VAR-related services for applications ranging from scientific and engineering to financial data management. Value-at-Risk (VAR) is a statistical risk measure that is used extensively for measuring the market risk of portfolios of assets and/or liabilities.