FocusUS Valero focuses on refining, ethanol after retail spin-off

01 June 2013 00:31  [Source: ICIS news]

US Valero focuses on refining, ethanol after retail spin-offBy Tracy Dang

HOUSTON (ICIS)--US Valero said its refining and ethanol producing businesses are doing well a month after it officially spun off its retail division, CST Brands, and as the new company opened its largest store on Friday in Three Rivers, Texas.

CST's 10,100-square-foot travel centre at the heart of the Eagle Ford Shale area sells gasoline, diesel and E85 fuel that has a blend of 85% ethanol, as well as food and merchandise for customers, many of whom are area oil field workers, CST CEO Kim Bowers said.

Spinning-off from the major refiner has allowed CST to focus 100% on the retail side, she said.

“It’s a win-win, certainly opening up an opportunity not only for moving fuels but also for selling as much fuel as possible,” Bowers said.

Valero spokesman Bill Day added: “CST is a financially strong company that remains a top customer of Valero.”

In October 2012, Valero had announced that it was considering separating its retail business.

“It was more of a question of whether our retail assets were getting the value of investors as they should have because the business was part of this much larger refining company,” Day said. “Plus, retail companies are not typically affected by economic ups and downs and are much more resistant to those trends.”

Spinning off the company would immediately create value for shareholders, and the San Antonio area would benefit because it would have another publicly traded company, he said.

Spin-Off Businesses

CST was not the first spin-off company for the US refiner.

The Valero brand used to include Valero LP, a logistics business with pipelines, terminals and crude oil storage facilities.

With the 2005 acquisition of pipeline and terminal company Kaneb, Valero had to meet federal antitrust conditions and decided to separate the business in 2006 and rebrand it as NuStar Energy in 2007.

“It benefits Valero stakeholders in San Antonio, where both companies were headquartered, and San Antonio got another publicly traded company,” Day said.

And CST may not be the last business that Valero spins off either.

During a conference call on its Q1 earnings, Valero said it is considering spinning off its midstream business into a master limited partnership (MLP).

“We had one with Valero LP, but that was a different time,” Day said. “Logistics today are different than back in the middle of the 2000s. Today, you have this revolutionary shale expansion in the domestic production of North American crude oil.”

He added: “Often in those non-traditional oil-producing areas, there’s not a lot of infrastructure moving the oil to where it needs to go. So you’re seeing construction of pipelines, construction of terminals, construction of storage tanks and construction of rail and loading facilities that companies like Valero are putting a lot of money into.”

A company could take all of those assets and instead create an MLP to generate more value for its shareholders, Day said.

“Other companies in our industry do seem to be moving away from things like retailing, and some have formed MLPs for their midstream assets,” he said.

Tesoro spun off its logistics business into Tesoro Logistics in 2011, and Marathon Oil spun off its downstream refining and logistical infrastructure into Marathon Petroleum later that year.

Valero had said it would look into the possibility of forming an MLP to house its midstream assets once the CST spin-off has been completed.

“We’ll probably explore that option through the rest of 2013, so it’s a little early to talk about specifics now,” Day said. “We’ll probably have a decision on that by the end of this year.”

Refining & Ethanol Opportunities

In the meantime, Valero has taken steps to strengthen its portfolio in the refining industry – even before the economic downturn, Day said.

While the company has sold closed refineries that were a not a good fit for its portfolio, it has also acquired several refineries.

Valero also intends to add 25,000 bbl/day of crude capacity to its McKee refinery in the Texas Panhandle but is “running into a bit of red tape” as it waits for its air emission permit, Day said.

In addition, the company is investing hundreds of millions of dollars to build crude topper units at its Houston and Corpus Christi refineries in order to process an additional 160,000 bbl/day of light sweet crude oil.

“Those are relatively small crude units, but they’re very complicated,” Day said. “Houston and Corpus Christi would buy intermediates from other refiners to be feedstock for the more complex processing. Now, it is more economic to run the light crude than to buy someone else’s intermediates.”

Valero is also investing in a lot of logistics to move crude by rail so the company can take advantage the Bakken, Eagle Ford and Permian Basin plays, as well as West Texas Intermediate (WTI) crude from the mid-continent.

At the same time, Valero created a renewable fuels division in 2009 with the purchase of its ethanol plants, which produce 1.2bn gal/year, and the construction of its 50 megawatt wind farm in the Texas Panhandle.

“So while we are focusing on refining and marketing, we are also interested in opportunities if they make sense to our business,” Day said.

He added: “We have positioned ourselves to be strong and to thrive – even in the markets that the best you can offer is low margins. We do anticipate this is going to be a very lean business. Sometimes you have to be the low-cost producer to be effective. You have to operate very efficiently and be a steward to doing well.”

However, Valero officials think the US will keep reaping the benefits as crude oil production continues to surge and the cost of natural gas remains low.

“We have a huge advantage to overseas refineries – not just in the refining industry but in all heavy manufacturing,” Day said. “If policy makers are smart about it, it will be less expensive to do business in the US. We can be very competitive with refineries around the world.”

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By: Tracy Dang
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