One Valero Way
San Antonio, Texas 78249-1112
Telephone: (210) 246-2000
Toll Free: (800) 531-7911
Fax: (210) 246-2646
Web site: http://www.valero.com
Sales: $54.62 billion (2004)
Stock Exchanges: New York
Ticker Symbol: VLO
NAIC: 324110 Petroleum Refineries; 422710 Petroleum Bulk Stations and Terminals; 424720 Petroleum and Petroleum Products Merchant Wholesalers (Except Bulk Stations and Terminals); 447110 Gasoline Stations with Convenience Stores; 447190 Other Gasoline Stations; 454311 Heating Oil Dealers
Valero Energy Corporation is the leading independent oil refiner in the United States. The company owns and operates 15 refineries with a combined capacity of 2.5 million barrels per day. About 60 percent of this capacity is in the Gulf Coast region through refineries in Texas, Louisiana, and Aruba. The remaining refineries are on the West Coast, the Mid-Continent region, and in the Northeast. Valero also markets refined products on a wholesale basis through a bulk and rack marketing network and via more than 4,700 retail sites branded as Valero, Diamond Shamrock, Ultramar, Beacon, and Total. About 1,500 of the retail sites are company-operated outlets combining a fuel station with a convenience store. Valero's marketing reach extends to 40 U.S. states, Canada, Latin America, and the Caribbean region. The company also owns a 46 percent interest in Valero L.P., a publicly traded limited partnership that owns and operates crude oil and refined product pipelines, refined product terminals, and crude oil storage facilities mainly located in Texas, Oklahoma, New Mexico, Colorado, and California.
Valero Energy was founded as a natural gas pipeline on the first day of 1980. In an effort to diversify itself into a broad-based energy firm, the company purchased a petroleum refinery shortly after its inception. Renovation and start-up of this facility in a difficult world petroleum market nearly put Valero out of business. The company subsequently sold off its natural gas properties to a limited partnership to retain financial stability and concentrate on its refining activities. Conditions in the petroleum industry repaid this gamble, and Valero Energy thrived in the late 1980s and early 1990s. From there, the Valero of the early 21st century was largely engineered through acquisitions. From 1997 to 2004 the company acquired 14 of the 15 refineries it now operates. The biggest of these deals came in December 2001 when Valero bought Ultramar Diamond Shamrock Corporation for about $6 billion in cash, stock, and assumed debt, thereby gaining six refineries and vastly enlarging its retail operations.
The company was created by the Texas Railroad Commission, the state's energy-regulating authority, to rectify the misdeeds of the Lo-Vaca Gathering Company, one subsidiary of the Coastal States Gas Corporation, Valero's corporate precursor. In the 1960s Coastal's chairman, Oscar S. Wyatt, Jr., had signed contracts to deliver gas to many customers, including several large Texas cities, at low prices, with the expectation that costs for gas would not rise. By 1972 and 1973, however, gas prices had risen dramatically, and the company was not able to fulfill its contracts. The Texas regulatory board allowed Coastal to pass on its higher prices to customers and to make a small profit, rather than see the company go out of business. The question of the penalty for Coastal's broken contracts became a matter of litigation that stretched through the mid-1970s.
Finally, in December 1977, the commission ruled that Coastal would have to refund $1.6 billion—more than the company was worth—to its customers. To satisfy this ruling, Coastal's intrastate Texas gas-gathering pipeline was spun off into a new company, Valero. Former Coastal customers were awarded 55 percent of the new company's equity, while the other half went to Coastal's shareholders, with the exception of Wyatt. In addition, Coastal was ordered to spend $230 million exploring for new gas over the next decade and a half. Any new gas found would be sold to Valero at a rate 15 percent below the current market price. Valero also got a $110 million chunk of Coastal stock.
Thus, at its birth, Valero became the largest intrastate pipeline in Texas, with 8,000 miles of transmission lines, assets worth $700 million, and start-up revenues exceeding $1 billion. In addition, Valero had the right to charge customers ten cents per million cubic feet (mcf) over its cost of gas in its first year, and 15 cents over mcf in its second, guaranteeing the company a profit of at least $23 million. Valero's stock was slated to be listed on the New York Stock Exchange shortly after its formal inaugural.
To separate itself from its corporate parent, Valero chose to locate its headquarters in San Antonio. The city was both the company's largest customer and an outpost 200 miles from Coastal's Houston home. The company's name was taken from the Mission of San Antonio de Valero, the original name of the Alamo. As its president, the company chose Bill Greehey, formerly the court-appointed head of Lo-Vaca. Greehey had been instrumental in negotiating the out-of-court settlement that resulted in Valero's formation.
Beyond Valero's basic gas business, Greehey planned to expand into gas storage and oil and gas exploration, as well as coal and oil refining. He planned to make Valero a "fully integrated energy company," as he told a Fortune correspondent in January 1980.
In its first year of existence, Valero moved quickly to solidify its position and expand into the nonregulated areas of its industry. The company tapped into new supplies of gas, signing contracts in Mexico and Texas, and also added new storage facilities. Announcing that it would spend $14 million expanding its production of natural gas liquids—which at the time were selling at high prices—the company planned to build a $10.2 million processing facility and construct a 25-mile pipeline. Valero also spent $4 million on tentative moves into the gas exploration and drilling business.
Valero made its most significant investment late in 1980 when it bought a one-half interest in Saber Energy, Inc., a small marketer of gasoline, for $51 million. With its new partner, Valero planned to turn Saber's tiny gasoline-producing operation in Corpus Christi, Texas, into a state-of-the-art specialized refinery. The facility was designed to use the product at the bottom of a barrel of crude oil—a high-sulfur, tar-like substance known as atmospheric residual oil (abbreviated "resid")—as its raw material, or "feedstock." Resid was obtained as a byproduct of the processing of raw crude oil and generally cost significantly less than a barrel of crude, which was the feedstock of a conventional refinery. By cracking resid in a complicated and expensive process, Saber's refinery would create high-quality gasoline. In the Saber partnership, the company made its bid to become a broad-based energy concern.
In 1981 Valero embarked on the construction of the new refining facility, which was slated to cost $100 million. In addition, the company revamped its somewhat ineffective exploration and production operation, moving aggressively to get underway and opening regional offices in Midland and Houston, Texas; Denver, Colorado; and New Orleans, Louisiana. By the end of the fiscal year, Valero's net income had risen to $97.3 million, an increase of more than 50 percent from the previous year.
By 1983 Texas was in the grip of a severe recession, and Valero's outlook was growing less rosy. The company's earnings from its core businesses—gas sales and transportation of other people's gas through Valero's pipelines—went into decline. In an effort to counteract losses, Valero joined in industry efforts to encourage the shipment of gas directly to large commercial customers, which helped somewhat to prop up its earnings.
In its new endeavors, Valero had mixed success. Although the company had spent $100 million on exploration, it had yet to benefit from these efforts. Valero's natural gas liquids business, however, proved prosperous. The company had increased its gas liquids capabilities by 50 percent, building eight plants at a cost of $150 million to stockpile ethane, butane, and propane, and these facilities contributed significantly to Valero's profits. "If not for gas liquids," Greehey told Business Week in 1983, "we would have been in trouble."
The biggest problem proved to be Valero's large investment in the Saber gasoline refinery. Two years into the project, estimated costs had reached $617 million, the most ever spent per barrel of oil on a refinery. Valero had taken on $550 million in debt to finance construction, and by 1983 the project was behind schedule. Experiencing difficulties meeting federal air pollution standards, the company was forced repeatedly to postpone full start-up of the facility. In addition, the economics of the refinery had shifted significantly since the project's inception. When Valero had started out, resid had been very cheap, while gasoline, the refined product, had been selling at a relatively high price. This justified large expenditures to convert one into the other. By 1983, however, the cost of Valero's raw materials had risen, and an oversupply of gasoline had driven prices for its end product down, dramatically reducing the potential profitability of the refinery.
The cost of raw materials for Valero's refinery was driven up further in 1984 when Great Britain suffered a coal strike. Unable to use coal as a fuel, British industry turned to resid instead, driving the demand and the cost of Valero's feedstock to unexpected heights, which at times exceeded the cost of straight crude oil. As a result of this stroke of bad luck, Valero's Saber refinery had still not become profitable by the middle of 1984.
Valero is a premier refining and marketing company that leads in shareholder value growth through innovative, efficient upgrading of low-cost feedstocks into high-value, high-quality products.
Valero had certified to its lenders that the refinery was up and running two months after it had originally planned, but even after this step was taken, low gasoline prices meant that the plant was operating at a loss. In August 1984 heavy trading of Valero's stock prompted speculation that the company would be the target of a takeover.
Saber posted losses of $53 million in the first half of 1984, and by that fall, its rapidly weakening financial condition had obligated Valero to buy out its partner. In doing so, Valero added Saber's substantial debts to its own large tally of borrowed funds, doubling its overall level of long-term indebtedness. As a result, the company was forced to omit a dividend to its shareholders in the quarter in which the consolidation was made. To placate its worried bankers, Valero agreed to limit its spending on other areas of its business while it postponed payments to the bank on its loans. With this news, the price of the company's stock sank to its lowest point, as investors anticipated the company's possible bankruptcy.
In an effort to shore up its financial condition, in February 1985, Valero entered into an agreement with Techniques d'Avant Garde Group SA, known as TAG, a holding company controlled by Saudi Arabian Akkram Ojjeh. TAG invested $15 million in Valero as part of an agreement that the Saudi investor would raise its interest in the company to one-third if Valero could locate a cheap source of raw materials for its refinery. In a second bid to raise funds, Valero sold off a 50 percent interest in its West Texas pipeline system to InterNorth, an energy company based in Omaha, Nebraska. The sale brought the financially beleaguered company $68 million.
By late spring of 1985, more favorable conditions in the energy industry as a whole had begun to lift Valero's prospects. As costs for crude oil byproducts fell and the price of gasoline rose, the Saber refinery was able to increase its earnings, posting a small operating profit for March. Despite this good news, the company temporarily suspended its production of gasoline at the Saber facility, resuming operations in June. The following month, Valero's agreement with TAG, the Saudi investor, was called off. At the end of 1985 Valero reported losses of $16.1 million.
By early 1986 Valero was also suffering from a glut in its original field, natural gas. Unable to sell the gas it had contracted at its founding in 1979 to buy from its corporate parent, Coastal, Valero refused to fulfill its contracts and in January, was sued by Coastal for $243 million in the first of a number of "take-or-pay" suits over gas purchase agreements that would not be resolved until the end of the decade.
In an effort to strengthen its financial position, Valero restructured $700 million of its debt in April 1986 and got out of the coal business by selling off the mine it owned in Indiana. Unable to make its expensive Saber refinery profitable given conditions in the world oil market, Valero began to informally hunt for a buyer for the facility. Despite the drain on funds by the unprofitable refinery, however, improved performance in Valero's pipeline operations enabled the company to finish the year in the black, posting profits of $34.7 million.
Faced with the problem of a profitable gas business that was carrying a money-losing refinery, Valero significantly restructured itself in early 1987. The company spun off its natural gas pipeline and natural gas liquids businesses into a limited partnership, Valero Natural Gas Partners, L.P., in which it would hold a 49 percent share. For this portion, Valero turned over $184 million of its own money, as well as $191 million contributed by public equity investors. The remainder of the gas partnership's funding was raised through the issuance of $550 million in notes. In addition to these moves, Valero abandoned its attempts to find oil and gas reserves, shutting down its exploration activities.
With the money from the divestiture of its gas assets, Valero was able to reduce its dangerously crippling debt load by more than $700 million, restoring its balance sheet to relative health. This meant, however, that the core of the company was its money-losing refinery. Valero lost $13.3 million in the first six months of 1987 on its refining and gasoline marketing activities.
By 1988, however, the climate for petroleum refining had improved, and Valero began to see a turnaround in its fortunes. Lower prices for its raw materials, coupled with reduced gasoline inventories and growing customer demand, enabled the company to turn a profit of $13.2 million in the first half of the year. Noting that the recent turmoil in the oil and gas industry had put many refineries out of business, Valero's leaders were confident that domestic demand for gasoline would continue to exceed refining capacity, keeping prices high. In addition, the company counted on the fact that the product it refined was high-quality, high-octane, clean-burning unleaded gas, for which it anticipated a growing demand.
On the supply side, Valero noted that prices for resid had fallen as stockpiles had grown, and the company moved to upgrade its refinery, increasing capacity. To assure future steady supplies of raw materials, the company sought to take on a foreign petroleum producer as a joint owner in the refinery. Valero ended 1988 with $30.6 million in posted profits.
The company's fortunes continued to improve in the following year. Valero's half-owned natural gas operations had profited from the deregulation of the gas industry; it increased its sales by adding customers outside Texas. The company was able to transport, through interstate gas pipeline linkups, and sell gas to clients in other states and in Mexico. Its number of gas processing plants had grown to 11.
Valero also continued to upgrade its oil-refining facilities. The company added a device that enhanced the octane level of the gas it produced and also constructed a natural gas processing plant that split the gas into products to be used in petrochemicals or oil refining activities. In 1989 Valero announced that it would own a 20 percent stake in a planned $104 million plant for processing gases given off in the refining process in Corpus Christi, Texas. These measures, along with the reduction in Valero's debt load, allowed the company to reduce its break-even point for a barrel of refined oil from $6.00, when the plant had started up, to $3.60 in 1989. As a result of refinery upgrades and the strengthened market, Valero was able to restore its dividend payment in a sign of fiscal health in the second quarter of that year. The company finished 1989 with profits of $41.5 million.
Valero's recovery from the severe difficulties it had experienced in the mid-1980s continued as the company moved into the 1990s. The world oil industry was thrown into turmoil in August 1990 when Iraq invaded major oil producer Kuwait, driving up the prices of both crude oil and refined petroleum products. With this increased activity, Valero contracted for an additional $200 million investment in its refinery facilities. The company ended the year with earnings of $94.7 million, nearly double those of the year before. In a reversal of earlier conditions, petroleum refining accounted for a vast portion of the profits, while the company's interest in its natural gas partnership contributed only 20 percent of the company's returns.
The launching of the Allied offensive in the Persian Gulf in early 1991 immediately drove petroleum prices down. In anticipation of this effect, however, Valero had sold much of its first quarter production in advance at inflated prices and added $30 million to its balance sheet. Although Valero lost money when it was forced to shut down part of its production to make improvements to its plant, the company completed 1991 with record profits of $98.7 million.
Looking to profit from the general move toward more environmentally conscious, cleaner-burning fuels, such as natural gas and the high-octane products refined at its Corpus Christi facility, Valero continued to upgrade its plants in 1992. In addition, the company expected that by 1994 their entire gasoline output would be made up of reformulated gasoline. With an eye to further expansion, the company solidified its balance sheet by repurchasing the outstanding shares of an old stock offering and sought permission to raise money for expansion by issuing new stocks. Valero also opened an office in Mexico City, in an effort to enhance its relationship with the Mexican government and assist it in its search for clean energy.
In May 1994 the company bought the 51 percent of Valero Natural Gas Partners it did not already own for about $117 million. Valero said that it wanted to expanded the natural gas business, but that the limited partnership structure inhibited growth. Valero soon began seeking a buyer for the business, however, an effort that continued into 1996.
Late in 1996 Valero officially announced plans to split the company up in order to concentrate solely on oil refining and marketing. In mid-1998 Valero completed a transaction whereby it sold its natural gas business to PG&E Corporation for $720 million in stock and the assumption of $780 million in debt. The deal was structured such that Valero's oil refining and marketing unit was first spun off to existing shareholders prior to consummation of the PG&E transaction. This spun-off unit retained the Valero Energy Corporation name, and the old Valero Energy was then merged into PG&E. The $1.5 billion Valero gained thereby was immediately leveraged to begin a massive, multiyear acquisition spree that would catapult the company into position as one of the largest refiners in the United States.
The first acquisition of this buying binge also occurred in 1997. Valero bought the Basis Petroleum, Inc. oil refining unit of Salomon Inc. for about $485 million in cash and stock. Basis operated three refineries on the U.S. Gulf Coast, two in Texas, in Texas City and Houston, and one in Louisiana, in Krotz Springs. The three refineries had a combined capacity of 260,000 barrels per day, more than doubling Valero's existing output from its original refinery. Although the Basis refineries had been operating at a loss for Salomon, this was in a way a positive for Valero: The facilities were in need of improvements, giving Valero an opportunity to overhaul the refineries just as it had done with the Corpus Christi plant. Already in late 1997, the company announced plans to increase capacity at all three Basis facilities.
After losing out to fellow San Antonio refining company Tesoro Petroleum Corporation in the bidding for a Shell Oil Company refinery in Anacortes, Washington, Valero succeeded in a September 1998 deal that saw it acquire a Mobil Corporation refinery in Paulsboro, New Jersey. Purchased for about $328 million, the refinery was located about 15 miles south of Philadelphia on the Delaware River and produced 155,000 barrels per day, increasing Valero's refining base by 25 percent. The deal geographically diversified Valero's production facilities and provided it with entrée into the markets of the Northeast.
After seeing its bottom line suffer in the late 1990s because of low crude oil prices, Valero, along with the rest of the U.S. refining industry, entered a new era of fat profits in the new century. Soaring crude oil prices, surging demand for refined products, and refineries operating at or near their capacities produced a volatile mix leading to higher prices at the pump and soaring net income for the refiners. As this new era began, Valero accelerated its strategic spending spree, which centered on buying plants for a slim fraction of their replacement value.
In 2000 the company gained further geographic diversity by buying Exxon Mobil Corporation's refinery in Benicia, California, for $895 million. The 165,000-barrel-a-day refinery, located near San Francisco, was a very good fit for Valero because it could process heavy crude oil and nearly 70 percent of its output was cleaner-burning gasoline, specifically the reformulated gasoline required by the California Air Resources Board. The deal also marked Valero's entry into the retailing market as it included about 350 gasoline stations, mainly in northern California. Valero envisioned the gasoline retailing business providing it with a buffer against the more volatile refining sector. It soon debuted the Valero retail brand at some of the acquired stations.
Valero truly catapulted itself into retailing—and into the ranks of the major players in the U.S. oil industry—through its unexpected acquisition of Ultramar Diamond Shamrock Corporation (UDS) in a deal completed on the last day of 2001. The price was shocking for a company that just a few years earlier had only one refinery: about $4 billion in cash and stock and the assumption of $2.1 billion in debt. Valero gained from UDS six refineries with a combined capacity of 682,000 barrels per day; they were located in Wilmington, California; Three Rivers and McKee, Texas; Ardmore, Oklahoma; Denver, Colorado; and Quebec, Canada. The deal also included UDS's nearly 5,000 retail gasoline stations operating under such names as Diamond Shamrock, Ultramar, and Beacon. Valero also gained control of Shamrock Logistics L.P. (soon renamed Valero L.P.), which owned and operated a 3,600-mile network of crude oil and refined products pipelines. Valero was now the top independent refiner in the United States and one of the leading gasoline retailers as well. With the completion of the UDS deal, Valero saw its revenues soar, jumping from $14.99 billion in 2001 to $26.98 billion the following year.
To gain regulatory approval for the UDS acquisition, Valero had to sell UDS's Golden Eagle refinery located in the San Francisco area along with 70 northern California service stations. These assets were sold to Tesoro Petroleum in 2002 for $945 million. The integration of UDS into Valero was completed without layoffs—a hallmark of the way Greehey did business. Even when Greehey sold the natural gas business to PG&E, he insisted on extracting a promise from the acquirer that none of his former employees would be laid off. Although in each of the several huge mergers that rocked the oil industry in the late 1990s and early 2000s, thousands of employees had lost their jobs as a result, Greehey, according to the San Antonio Express-News, simply said, "That's not the Valero way." The company under Greehey's leadership was also well known for its generous corporate giving program.
Two more refinery acquisitions followed in the wake of the UDS deal. In July 2003 Valero spent about $549 million for a refinery in St. Charles Parish, Louisiana, that had daily capacity of 215,000 barrels. Purchased from the financially troubled Orion Refining Corporation for 20 percent of its replacement cost, this refinery, located adjacent to the Mississippi River, was again a perfect fit for Valero in that it could process cheaper heavy, sour crude oil while meeting environmental regulations. In March 2004 Valero bought a 315,000-barrel-per-day refinery located on Aruba from El Paso Corporation for $465 million plus about $168 million for working capital—a price that represented only about 15 percent of the replacement cost. This refinery too was capable of processing heavy, sour crude.
Valero's strategy of basing its feedstock largely on sour crude oil, which was selling at a large discount to sweet crude oil—the discount having averaged more than $11 per barrel in 2004—paid off big in 2003 and 2004. After posting profits of $622 million on $37.97 billion in revenues in the former year, Valero then nearly tripled its profits one year later, making $1.8 billion on revenues of $54.62 billion. By 2004 the company, every day, was turning two million barrels of crude oil into 40 million gallons of gasoline, which amounted to 10 percent of the U.S. supply. While there were many skeptics who believed the next oil industry bust was right around the corner, Greehey for one remained quite optimistic, contending that the conditions that had created the boom—high crude oil prices, increasing demand for refined products, and refinery utilization at or near capacity—were likely to continue. He told the San Antonio Express-News in July 2004, "I think at least for the next four or five years, the refining business is going to be absolutely the best business to be in." Underscoring this conviction, and catapulting it into the lead in domestic crude oil refining, the company inked a deal in May 2005 to acquire Premcor Inc. by the end of the year for $3.4 billion in cash and $3.5 billion in stock. Valero was likely to pursue additional acquisitions of refinery assets as well as increase the capacity of a number of its existing refineries in the years to come.
Colorado Refining Company; Valero Canada L.P.; Valero Refining and Marketing Company; Valero Refining Company—Aruba N.V.; Valero Refining Company—California; Valero Refining Company—Louisiana; Valero Refining Company—New Jersey; Valero Refining—New Orleans, L.L.C.; Valero Refining–Texas L.P.
BP p.l.c.; Exxon Mobil Corporation; Royal Dutch/Shell Group of Companies; ChevronTexaco Corporation; TOTAL S.A.; ConocoPhillips; Marathon Oil Corporation; CITGO Petroleum Corporation; Motiva Enterprises LLC; Amerada Hess Corporation; Sunoco, Inc.; Tesoro Corporation.
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—update: David E. Salamie