Valero Looks To Get U.K. Refinery on the Cheap (CVX, VLO, HOC, FTO, RDS-A, BP)

Almost a year ago, Chevron Corp. (NYSE: CVX) put out the word that it was looking to sell its Pembroke refinery in Wales. The offers didn’t exactly come pouring in. Refining is just too tough a business, too cyclical, to attract a lot of high-dollar offers. Unless, of course, an offer comes from an existing refiner that knows a good deal when one’s on offer.

It now appears that Chevron has a deal to sell Pembroke to Valero Energy Corp. (NYSE: VLO) for about $2 billion.  Pembroke can process 210,000 barrels/day of heavy, sour crude — typically available at a substantial discount to the benchmark prices for light, sweet WTI or Brent.

If the Bloomberg report is accurate, and Valero does pay $2 billion for the refinery, the cost to Valero is about $9,500 per barrel of installed capacity. In the recent merger between Holly Corp. (NYSE: HOC) and Frontier Oil Corp. (NYSE: FTO), both much smaller than Valero, Holly is paying about $2.9 billion for Frontier’s 187,000 barrel/day capacity, or about $15,500 per barrel of installed capacity. Both prices include crude inventories on hand.

In another recent international refining deal, India’s Essar Energy agreed to pay $350 million for UK Stanlow refinery on offer from Royal Dutch Shell plc (NYSE: RDS-A). Stanlow’s nameplate capacity is 296,000 barrels/day, so the cost per installed barrel of capacity is just shy of $1,200. But Shell’s crude stocks are not included in the price. Add in an estimated $780 million worth of crude, and the cost per installed barrel climbs to about $3,800.

For comparison, when Valero bought Premcor in 2005, the deal was worth about $8 billion and the cost per barrel of installed capacity was about $9,500, which also included stocks of crude. BP plc (NYSE: BP) has put up for sale two US refineries with a total capacity of about 740,000 barrels/day with an asking price of about $4 billion, or $5,400 per installed barrel of refining capacity.

Without knowing the amount of crude in inventory at Pembroke, it’s hard to figure out exactly what Valero’s paying for the physical plant, but if the Stanlow deal is any guide, the physical plant amounts to about 30% of the total price paid, meaning Valero gets Pembroke for about $2,400 per installed barrel, not including the stocks on hand. It also gets its first European operation and a facility that can handle cheaper crudes. Building a new refinery would cost upwards of $12,000 per installed barrel.

This looks like a good deal for Valero, and it may turn out to be a great deal. Traders are skeptical, pushing the stock down by about -5% in morning trading, to $26.34, within the 52-week trading range of $15.49-$30.42.

Paul Ausick