Valero Energy Corp. (VLO) (VLO)’s plan to cleave
its convenience stores and gas stations from oil refining may
allow the company to bolster its balance sheet by paying off
debt and abandoning a business with narrowing profit margins.
The largest U.S. refiner by processing capacity aims to
leave its retail unit with a comparable debt load to peers and
keep investment-grade ratings for the remaining business. A
dividend to the parent from the spinoff combined with reduced
capital spending would let Valero pay off about $480 million of
bonds due next year (VLO) and leave the retailing business with about
$750 million of debt, according to Gimme Credit LLC.
While Valero will lose the 9.3 percent (VLO) of sales generated
by cigarettes, beer and snacks, margins are narrowing in the
retail business as those in refining grow. The spinoff may also
take more debt relative to its earnings than the refinery
segment, according to Madison Investment Holdings Inc.
“You can look forward to getting some cash in from the
retail spin and an improving free cash flow outlook from the
perspective of a capex plan that’s lower next year,” Philip Adams, an analyst at Chicago-based bond-researcher Gimme Credit,
said in a telephone interview. “There’s cash coming in that
will be dedicated toward debt reduction.”
Record Low
Valero’s most actively traded debenture, its 6.625 percent
bond due in June 2037, increased 0.73 cents on the dollar to
121.78 cents yesterday to yield 5.07 percent, the lowest level
since the San Antonio-based company issued $1.5 billion of the
debt in 2007.
Chief Executive Officer Bill Klesse said yesterday on a
conference call that the company was committed to retaining its
investment-grade rating, and Chief Financial Officer Mike Ciskowski said leverage at the new retail business would be
comparable to peers.
Bill Day, a spokesman at Valero, which is rated two levels
above junk by the three biggest ratings firms, said the company
couldn’t comment on specific plans for the spinoff’s capital
structure.
By assuming the $750 million of borrowings that Gimme
Credit’s Adams estimated the retail business could support, the
separation would allow Valero to trim 10.7 percent of its debt (VLO)
while losing 9.2 percent of its earnings before interest, taxes,
depreciation and amortization, according to data compiled by
Bloomberg and based on Klesse’s Ebitda estimate of $500 million
for the retail unit.
‘Credit Positive’
“I don’t see the retail company taking 10 percent of the
debt with it; I think they’re going to take more,” Alan Shepard
of Madison Investment, whose firm in Madison, Wisconsin,
oversees about $16 billion of assets and owns Valero bonds, said
in a telephone interview. While “the shifting of debt off to
the retail company is a credit positive for Valero,” the risk
that refining margins may deteriorate makes the spinoff plan
credit neutral, he said.
Valero’s retailing margins have narrowed since 2009 to 3.26
percent from 3.72 percent with operating income of $381 million
in 2011, Bloomberg data show. That compares with an increase to
3.22 percent from 0.44 percent for the refining business, which
generated $3.5 billion last year.
New U.S. crude production in Texas and the Midwest has
flooded markets and allowed refiners to buy oil for less. The
crack spread, a measure of the difference between the cost of
West Texas Intermediate crude and the price at which refiners
can sell fuel, averaged $28.98 in the April-to-June period,
almost four times the average since 1987.
Refiners Rise
Shares of refining companies such as Valero and Marathon
Petroleum Corp. have gained 35 percent this year to lead every
other energy sector. That compares with a 9.7 percent return for
the Standard Poor’s 500 index.
Capital spending at Valero may drop as much as 44 percent
next year as the company completes construction on two plants
that use hydrogen to break down oil into lighter products such
as gasoline, jet fuel and diesel fuels, the company said in a
statement yesterday. That will boost funds that Valero can use
to reward shareholders through dividends or stock buybacks, to
reinvest in the company or to pay down debt.
“That is very, very helpful” for bondholders, Brian Gibbons, an analyst at CreditSights Inc. in New York, said in a
telephone interview. While it’s too early to say whether the
planned spinoff will improve Valero’s credit quality, “it’s at
worst credit neutral,” he said.
‘Stable Part’
The split may hurt the company’s credit by removing “the
most stable part of Valero’s earnings and cash flows,” Moody’s
Investors Service analysts led by Gretchen French wrote
yesterday in a report.
Operating income from the retail unit is more stable than
refining, generating between $200 million and $400 million each
year since 2006 while accounting for as much as 42 percent of
the company’s total in 2009 and as little as 3.3 percent in
2007, Bloomberg data (VLO) show.
Valero’s Baa2 rating from Moody’s “remains supported by
its large operating scale,” diversity among refining operations
that spreads the risk of plant shutdowns and good liquidity, the
analysts wrote.
“We do not anticipate anything harsher than a negative
outlook,” JPMorgan Chase Co. analysts led by Robin Levine
wrote yesterday in a research note. Valero’s ratio of debt to
earnings probably won’t exceed 1.5 times even without paying
down debt after losing the retail unit, they said.
The company’s ratio of debt to Ebitda has been below 1.5
times for the past 12 months, the longest stretch since the
first three months of 2009, Bloomberg data show. The gauge was
1.3 in the second quarter, the lowest since 2008.
“For the Valero business that’s going to stay, it’s
definitely going to benefit from a leverage standpoint,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC
in Philadelphia, said in a telephone interview.
To contact the reporter on this story:
Charles Mead in New York at
cmead11@bloomberg.net
To contact the editor responsible for this story:
Alan Goldstein at
agoldstein5@bloomberg.net
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