Valero’s Refined Approach Still Confounds the Skeptics
Maybe the crazy man wasn’t so crazy.
In 1997, Bill Greehey told skeptical Wall Street analysts that there was money to be made in the oil refining and marketing business, long considered the unrewarding stepsister to exploration and production. What’s more, he said, his small Texas company in five years would become a leading U.S. refiner, capable of processing 2 million barrels of crude oil a day.
“The financial community just laughed,” Greehey recalled in a recent speech.
Greehey, chairman and chief executive of Valero Energy Corp., delivered anyway. The San Antonio company owns 15 refineries, including two in California, processing up to 2.4 million barrels of oil a day -- 12% of total U.S. refining capacity.
After some dismal post-9/11 results in 2002, Valero rebounded to earn $617 million, or $5.09 a share, in 2003, and analysts’ average profit estimate for this year is $5.53 a share. Wall Street has responded by boosting Valero shares 83% this year; the stock fell 64 cents to $42.33 on Monday on the New York Stock Exchange.
Much of Valero’s success can be attributed to sky-high fuel prices and record profit margins that have showered money on all refiners. A good deal also stems from Valero’s use of so-called sour-grade crude oil. The higher-sulfur grade recently could be bought for $13 a barrel less than easier-to-refine light sweet crude, which a week ago set a fresh record of $55.17 a barrel.
In an interview, Greehey said changes in the gasoline market -- the expanding use of specialty fuels, the dearth of extra refining capacity and steady growth in demand -- would keep the refining industry humming for years.
Question: Plenty of skeptics still question your contention that refining is a winner. Why?
Answer: I don’t know how they can say that there have not been fundamental changes that have occurred in our industry. I can’t imagine anything happening where we would ever not make a lot of money. I can’t even name any scenario.
All I can say is we’ve been more right, and they’ve been more wrong. To have the [gasoline] prices that we’re having, and it’s not changing driving patterns at all, they’re still buying SUVs, they’re still buying pickups. It’s unbelievable to me. But it’s a strong economy, and they have more disposable income.
Q: What about the price of oil right now?
A: First of all, the appetite for sweet crudes is really causing a lot of it. The world is changing, and the world is changing because we don’t have that much excess capacity to put into the market.
The other thing that’s changed, which I don’t know how you measure, is there is so much money in hedge funds, and they’re putting so much money into [oil] futures. They have made so much money over the last few years, it’s been unbelievable. And the more they make, the more they put in.
Q: Do you think the high prices are permanent?
A: You know, I really don’t. I think crude is way too high. I think everything’s too high. The Saudis are talking to us.... They’re saying that they can ramp production up pretty quickly. Their goal is always to try to have a couple million barrels a day of surplus production that they can put into the market. I think oil will probably trade between $35 and $40 if I was guessing. But I don’t think it’s going to go below $30.
Q: You recently called California “by far the most profitable market.” What makes California so profitable for refiners?
A: It’s just that supply and demand is so tight and imports can’t come in.
Q: You can make California gasoline in your Corpus Christi refinery in Texas. When supplies are tight and gasoline prices are high, do you send cargoes west?
A: The problem you have with Corpus Christi is you’re trying to anticipate what’s going to happen in four weeks with supply and demand. It takes about two weeks to switch our refinery ... then we have another two weeks to get it into the market. If you look at a price spike that occurs in California, most of the time in four weeks it’s all corrected, so by the time you get it there, it’s not needed.
Q: I know Valero has expanded capacity at your California refineries in Benicia and Wilmington in the past. Any chance of further production increases?
A: There’s not anything really there that we can do. We’re pretty much at the limit.
Q: Politicians and others say the state’s refiners don’t have any incentive to expand. For refiners, isn’t less supply better?
A: We are so sensitive to prices in California that we do not want to see price spikes. Everybody wants to produce as much as they can to keep the prices down.
Q: Why is that?
A: I think it’s the right thing to do. I don’t think you hold back production to get prices spiked up. A lot of times the best interest isn’t profit. A lot of times the best interest is the reputation of the company and the credibility of the company and customer relationships.
Q: What do you think about all these investigations into gasoline prices?
A: We’re in a commodity business, and it’s supply and demand. If there’s going to be an investigation, let there be an investigation. They’re not going to find anything. Nobody controls the market. The market sets the prices. Regulations influence the markets.
Q: What do you think California should do to prevent such high fuel prices?
A: You can’t backpedal to where instead of having [California Air Resources Board-mandated] gasoline you have [less-clean] reformulated gasoline. That would be an easy answer. But at some point they ought not to have your own standard. I think in 2006 ... California really ought to think about whether they want to have that separate gas specification as opposed to the U.S., because then they’re going to be so close and they would really benefit from that supply being available.
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Refined approach
Valero Energy Corp. has 1,668 employees in California. Here is a look at its facilities in the state:
Refineries
* Benicia: purchased in 2000; daily processing capacity,
175,000 barrels of crude oil
* Wilmington: purchased in 2001; daily processing capacity, 140,000 barrels of crude oil
Asphalt plants
* Benicia: purchased in 2001; makes 25% of Northern California supply
* Wilmington: purchased in 2001; makes 15% of Southern California supply
Retail outlets
* Ninety-three sites with Beacon, Ultramar and Valero brands
Source: Valero Energy Corp.
Los Angeles Times
