Valero Commences Logistics IPO, Setting Up for Refinery Payday

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Continuing a trend begun in May, Valero Energy Corp. (NYSE: VLO) on Monday commenced an initial public offering (IPO) of a logistics group called Valero Energy Partners L.P., announcing plans to sell 15 million common units of the master limited partnership (MLP), which represents a stake of about 25.5% in the MLP. Underwriters have a 30-day option on an additional 2.3% of the new company’s common units and, if all are taken, public ownership of Valero Energy Partners will total 29.4%. The new company’s stock will trade on the NYSE under the ticker symbol VLP.

In May, Valero spun off its retail business into a new company called CST Brands Inc. (NYSE: CST) but continues to supply fuel to the stores under a long-term contract. Valero Energy Partners will get assets in Sunray, Texas; Memphis, Tenn.; and Port Arthur, Texas.

More than half of Valero’s refining capacity is on the Gulf Coast, where the company believes it enjoys a price advantage on crude supplies ranging up to $5 a barrel comparing Bakken crude to Brent. That advantage includes the company’s rail transportation cost from the Bakken to Cushing, Okla., of $9 a barrel. The falling price of Louisiana Light Sweet now prices the grade at a discount of around $3 a barrel to Brent.

The strength of Valero’s position is that if the price of Brent should fall, it can import (or threaten U.S. producers that it will import) more. U.S. West Texas Intermediate (WTI) crude priced now at around $93 a barrel is expected to fall further, and that price decline will be controlled by how much Valero and the other major independent refiners are willing to pay for WTI. Refiners like Valero, Phillips 66 (NYSE: PSX) and Marathon Petroleum Corp. (NYSE: MPC) are now in the driver’s seat.

The price of Valero Energy Partners’ common units will not be announced until the IPO is completed, likely within the next few days.

Valero Energy Corp.’s stock was up 2.75% in the late morning on Monday at $46.99, after posting a new 52-week high of $47.03. The stock’s 52-week low is $28.30.