Interview: Valero energy
>> more on the big energy deal, valero energy buying premcor for $6.9 billion in cash and stock to form the largest u.s. refiner. william greehey is the chief executive officer of valero energy and he spoke with brian sullivan earlier today.
>> we’ll have, you know, about 16% of the market when the premcor deal is done. we’re in a global market but we’re satisfied for now.
>> who approached whom on this deal?
>> we were talking on and off. tom mcnally is a good friend. we’ve been talking since 2001 on the transaction.
>> you and i have chatted before and you may know a secret that you thought the way to grow was through acquisition because of the tough environmental regulations surrounding new building.% but with your stock up and the political climate the way it is around high gasoline prices, do you think you can build new refineries at this time?
>> the economics are becoming closer. if you look at this transaction, we maid about 70 -- paid about 70% of replacement costs and i think with refining margins as good as they are that acquisitions will be replacement cost economics.
>> it’s not like an oil deal, but harder to do a refining deal. we worked out stats, $8,090 per barrel of refining capacity per day. right now, you’re valued at $7,680. cuconvince the market you did not overpay for premcor?
>> absolutely. this thing is 15% accretive. we’re going to generate a lot of cash flow o.. on the cash portion, we’ll only borrow $3.4 billion, to be paid next year -- $1.4 billion.
>> how fast can you pay down the $1.4 billion?
>> it will be paid next year.
>> the whole thing?
>> absolutely.
>> do you expect earnings and margins to continue to be that strong?
>> i think margins will be better next year. the united states goes for a lower sulphur for gasoline than on-road diesel so you’ll have less production. so improved sour discounts will be wider.
>> you’ve been buying up and have grown through the use of heavy sour. it’s a higher profit margin if you can refine that. premcor, interesting, they have four refineries, two are heavy sour and two are light sweet. are you going to keep ahold of all four?
>> absolutely. they have plans for their refinery in ohio and are doing a study right now to process the heavy sour cruised coming from canada in the future.
>> so heavy sour will be the future in the short term for valero or long term, as well?
>> absolutely. our strategy is to continue the heavy for barrel of crude oil.
>> but you want to keep the light and sweet refineries of premcor just in case?
>> absolutely. memphis has a niche market and it’s a sweet refinery, but very, very profitable.
>> talk about possible regulatory issues. you have counsel and have spoken with lawyers about this. do you anticipate any regulatory difficulty over the deal?
>> no. first of all, we’re not in a u.s. market , but a global market .% but if you look at the east coast, we’ll be number three, about 250,000 or 300,000 barrels a day less than sunoco. on the gulf coast, we’ll be number two, about 250,000 barrels behind exxon so we don’t have a problem at all. we’re not number one in any marketing region.
>> 124 the end―is this the end of the deal making for valero? you are making $9 a barrel on profit, a lot of money, earning record earnings. is this the end of the deal making?
>> not at all. we’ve continued to grow through acquisitions. seven years ago, we had one refinery. this will now make 19 refineries so we’ll continue to look at refineries and acquisitions and then organic growth.
>> at some point down the road when bill greehey decides maybe to hang it up, how many refineries would you like valero to have?
>> i don’t know. that’s speculation. i think we’re going to have to move beyond the united states and we are looking at europe right now.
>> you are?
>> we are.
>> what looks attractive to you in europe right now?
>> we’re not that far along. but we are looking. we think that’s probably the next logical step.
>> that was william greehey, chief executive officer at valero energy. u.s. sales of previously owned homes unexpectedly rose in march. sales rose 1% in march to an annual rate of almost 6.9 million dollars. february’s figure was revised to $6.82 million. no change in the bond market in reaction, though. the 10-year note unchanged on the day, yielding 4.25%. the five-year note’s yield on the day little changed at 3.94 3r5067ing the―approaching the end of trading, the two-year note yield up two basis points. the dollar trading lower against the yen and pound, higher against the euro. the new york stock exchange may be facing a roadblock in its plan to merge with archipelago, or maybe not. we’ll tell you what one former new york stock exchange board member may be ready to do.
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Listen Market briefing --- Mike (fast)
What drove up stocks today --- Deirdre (slow)
Nasdaq --- Robert (slow)
Valero --- June (slow)
s&p 500 closed 10 points higher and nasdaq finishes up at almost 19 points with a gain on the day -- deirdre bolton has a store of what drove up stocks today.
>> amid the market ‘s sea saw ride lately, a gain today. mergers lifted investors’ spirits, the biggest, valero oil’s purchase of premcor. shares of other refiners soared, as well, on hopes of a merger soon, too.
>> investors are also taking earnings to heart. profits are growing 12%, far stronger than the 8% analysts expected when the quarter began.
>> during earnings season, you have a lot of news and when you have good earnings, the market moves up and negative earnings sees the market moving down and that’s why you have seen choppy trading.
>> earnings optimism lifted starbucks. prudential upgraded the stock, saying earnings per share would increase at least 20% over the next three to five years and current stock price does not reflect that growth. hsbc closed higher after reporting better-than-expected first-quarter results and record number of d.s.l. customers. apple computer was upgraded to outperform at cbs. and a day ahead of a report that may show a drop in consumer confidence, americans showed no fear about buying a home. home resales posted a gain last month as home prices jumped to an all-time high. an index of home building stocks closed higher today. year to date, this index has outperformed the s&p 500 by about 6%. back to you.
>> deirdre bolton. crude oil fell today after president bush said high oil prices damaged markets . his remarks coming prior to his meeting with saudi arabia’s leader, crown prince abdullah. the saudi prince is visiting bush at his ranch in crawford, texas. after-the-meeting, a saudi spokesman said the u.s. did not ask for more oil production and national security adviser said the saudis came with a plan in reference to last week’s proposal by saudi oil minister who increased production cast by 12.5 million barrels a day by 2009 from the plevent million.
>> it addresses the underlying issue you have when you talk about price, an issue of availability of oil and availability of capacity.
>> crude at the close of the regular session finished down 82 cents at $54.57 a barrel. among other energy movers today, they followed oil down -- gasoline, heating oil and natural gas futures lower on the day. energy shares stole the spotlight in the market . for more, here’s a fromraeborah kostroun at the big board. >> energy shares, one of the biggest gainers although crude oil fell for the first time in seven sessions as president bush met with saudi crown prince abdullah. merger talk helped things out with premcor at a 52-week high. the owner of four u.s. refineries agreed to be bought by valero energy for $6.9 billion in cash and stock to become the largest u.s. oil refiner. are the refiners gained on ideas that we could see more mergers in the works. refiners, a major part of the equation as they’ve been running at full capacity to meet the needs of gasoline for consumers. boeing, the biggest gainer in the dow jones industrial average. they won an order valued at as much as $6.1 billion at ace aviation holdings for 32 jets, helping the airline cut fuel costs . that areer is first from air canada since 1989 and the second biggest for 787’s. those are the airplanes boeing will be producing. looking at telecom, s.b.c., the biggest u.s. phone company, after their $16 billion purchase of at&t, they said first-quarter earnings fell 54% after a gain from a a year earlier. sales rose as customers bought wireless service and high-speed internet access. reebok, second biggest maker of athletic shoes, said first-quarter earnings rose 5.1% helped by footwear endorsements by wrap stars jay-z and 50 cent. maytag at a 52-week low and maytag slipping for a second day. the appliance maker said last week their profit slid 80% as oil and fuel cost rose.
>> breaking news from the new york stock exchange, the exchange is defending its proposed merger with archipelago, saying the planned merger makes strategic sense. the comments in response to a report that former stock exchange board member, kenneth langone, wants to break up the merger with archipelago. allan dodds frank will have more on langone’s bid coming up in this hour. optimism over tech earnings and several upgrades sent the nasdaq higher. robert gray has details on the trading there from the nasdaq marketsite in times square.
>> optimism over earnings and technology companies helping boost the nasdaq composite 1% in monday’s session. the volume, though, coming in well below the 1.9 billion share traded daily average for 2005 so far. we heard from rod smyth, chief investment strategist with wachovia, saying stocks may have made multimonth lows since they view current stock market weakness as a buying opportunity with a 15% potential upside to the top of the trading range. he says the top of that range is the 1300 level. we’ll keep an eye on that. the nasdaq going out at 1950, near the highs of the session. the 1950 level was resistance for monday so it will be interesting to see how the markets open but many traders and investorsgating charts to base strategies upon were watching the 1950 level. some of the upgrades today helping to lift the nasdaq 100, apple computer raised to outperform from neutral at csfb, raising the price target by $5 to $45 a share, saying the next leg of gains will be from the mac, not the ipod. they’re seeing apple’s 2% share with significant upside. starbucks also raised to overweight at prudential, from neutral, on valuation, saying they have highly predictable earnings growth. ciena also upgraded, raised to outperform at piper jaffray, liking the large contracts with phone companies such as verizon and m.c.i. shares of google rising to a record intradade and closing at a record high monday, announcing they will sell animated display ads that appear on other websites and give advertisers a way to target which sites where their spots will be seen. at the nasdaq, i’m robert gray.
>> want to get more details on the valero energy deal that helped send stocks higher. june grasso has details. and the implications of the deal.
>>it purchase pushes valero past exxon-mobil and conocophillips among u.s. oil refiners. valero will pay $3.4 billion in cash and issue $3.5 billion in stock. holders of premcor can sell each share for nearly one valero share or $72.76 in cash, 23% more than friday’s closing price.
>> this thing is 15% accretive. $1.67 a share. we’re going to generate a lot of cash flow. on the cash portion, we’re only going to end up borrowing $1.4 billion, paid next year out of cash flow. this is a tremendous deal for premcor and valero shareholders. the profit refiners get from converting a barrel of crude into gasoline and heating oil has averaged about $9 so far this year, up from $4 in the 1990’s. the last refinery built in the u.s. dates back to 1976.
>> we continue to have increasing demand for gasoline and distillate products, even at these higher levels, that we don’t have enough refining capacity to meet all our country’s needs. and therefore, you know, until the new refineries are built, which may never occur, we’re going to continue to see very strong and very favorable refining and marketing environment.
>> valero is a top performer in the standard & poor’s 500 index this year, shares up 57% after almost doubling last year. premcor shares have risen 65% this year. valero’s chief executive has built the company through more than $7.5 billion worth of acquisitions and he says this is not the end of deal making.
>> we’ll continue to grow through acquisitions. seven years ago, we had one refinery. this will now make 19 refineries. so we’ll continue to look at refineries and acquisitions and then organic growth.
>> under president bush, the federal trade commission has not tried to block any proposed refinery takeovers and during president clinton’s eight years of government, only once was an oil industry merger blocked.
>> june grasso. we’ll have more on valero, the entire interview with valero’s c.e.o., william greehey, next.
