Valero cashes in on rising petrol demand

Which company is most responsible for getting gas into America’s tanks? Most people would guess Exxon, but it is Valero, a 27-year-old youngster in an industry dominated by centenarians.

This relatively low-profile company is the US’s biggest refiner, converting more crude oil into petrol and other refined products than any other oil and gas company in the country.

Certainly it has its name on thousands of stations across the US, but it does not have the market recognition of the nation’s explorers and producers.

Refiners have always been considered the stepchild of the industry. But the rise in petrol demand amid tight refining capacity, has put a premium on Valero’s products, pushing it to No.43 on this year’s Fortune Global 500 list, up from 73 two years ago.

With revenues of $92bn, and $5.5bn in net income last year, Valero is cashing in on its unusual bet on the refining industry.

Robin West, chairman of PFC Energy, the consultancy, notes that Valero began to pick up refining assets when the refining and marketing segment was still a poor performer.

“It’s a classic case of consolidation at the right time in the cycle,’’ Mr West said. “It was a risk.’’

It has paid off enormously. Valero’s name is linked to the Alamo, one of Texas’s most famous battle sites. The Alamo, located in San Antonio where Valero has its headquarters, was originally called Mission San Antonio de Valero. Along with the name, Valero has sought to capture the independent spirit that made that important battle of the Texas revolution famous.

At a time when US refineries are being run at or near capacity to meet ever-rising US demand, the company is leading the charge to bring fuels to market. It has 17 refineries spread across four US regions, built over 10 years of consolidation.

In 2005, Valero became the largest refiner in North America and went global. By the end of that year, it also was one of the largest terminal and petroleum liquids pipeline operators in the US, with 9,186 miles of pipelines, 89 terminals, and bulk storage facilities strategically in leading US markets and in the Netherlands Antilles, Canada, Mexico, the Netherlands and the UK.

Two years later, margins could not be better: year-to-date Gulf Coast petrol margins are 30 per cent higher than this time last year, and year-to-date diesel margins are 15 per cent higher. Margins are expected to stay up, given that the cost of expanding refineries or building new ones is continuing to rise, limiting growth in competition.

Prices of steel, for example, are up 74 per cent since 2004, and heavy-wall reactors are up 133 per cent. Gulf Coast skilled labour is also more expensive, up 60 per cent in the past three years.

Yet Valero’s strategic focus from what would now be an expensive expansion has changed. “Bargains are gone,’’ the company said in a presentation last month to European investors.

It said the time was right to focus on improving operations, projects for organic growth and returning cash to shareholders. It is selling less strategic assets and targeting at least $1bn in annual operating income improvements over the next five years.

Bill Klesse, who became chief executive in 2006, is presiding over Valero’s next stage of development.

In Citigroup Global Markets’ latest research report on Valero, it implies it should be a favourable run: “Following a very strong period of growth, fuelled by a number of well-timed acquisitions, Valero has secured the scale, diversity and economics to be uniquely positioned to ride the apparent renaissance in refining margins and, critically, the increasingly favourable trend in heavy oil economics.’’

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