Valero Grabs Another Refinery (VLO, MUR, CVX, HFC)

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Crude oil refining doesn’t get much respect. The business is cyclical to the point of fickleness and it is often a drag on the profits of integrated oil & gas companies. Maybe that’s why Valero Energy Corp. (NYSE: VLO), the nation’s largest refiner, is able to get such good deals when the integrated companies decide it’s time to shed their refineries.

Valero has just spent $625 million to purchase a Louisiana refinery from Murphy Oil Corp. (NYSE: MUR). The price includes $300 million for the crude oil and product currently in storage at the refinery. The plant can process 125,000 barrels/day of crude oil and includes a 34,000 barrel/day hydrocracker that produces high-margin hydrocarbons.

Based just on crude refining capacity, Valero is paying $5,000/barrel of capacity. Last March the company acquired the Chevron Corp. (NYSE: CVX) 210,000 barrel/day refinery in Wales for $2 billion, including inventories, or about $9,500/barrel of capacity. When Holly Corp. merged with Frontier Oil to form HollyFrontier Corp. (NYSE: HFC) earlier this year, Holly paid $2.9 billion for refining capacity of 187,000 barrels/day, or about $15,500/barrel of capacity.

Backing out the cost of the inventory, Valero nabbed the Louisiana refinery for $2,600/barrel and the Welsh refinery for for about $2,400/barrel. Building a new refinery costs about $12,000/barrel, so Valero made out like a bandit on both deals.

Refining is very profitable now due to the spread between Brent and WTI crudes. The spread today is nearly $26/barrel. Refiners on the east coast and on the Gulf coast price their refined products based on the price of Brent crude. That means that any refiner with access to WTI crude receives a $26/barrel discount on feedstock, but gets the same price for the refined product.

This is the reason that gasoline pump prices have fallen just 4% since Memorial Day while Brent prices have fallen by nearly 3 times that in the same time period.

For continued prosperity, Valero is no doubt counting on the discounted price of WTI crude to remain in place for some time to come. And there is plenty of evidence that the price for Brent is replacing the price for WTI as the world’s benchmark. That, too, could spell a smoothing of the volatility in refining.

Both Valero and Murphy are lower in the first 15 minutes of trading this morning. Valero is down more than -3%, at $21.79, in a 52-week range of $16.21-$31.12. Murphy is down more than -4%, at $51.23, in a 52-week range of $47.24-$78.16.

Paul Ausick

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