Engineering News

Valero Positions Itself As 'Lean, Mean' Refiner - Klesse
Tuesday, July 29, 2008

To survive a downturn in the refining sector, Valero Energy Corp. is retrenching, cutting back on its spending and reducing production as necessary, Chief Executive Bill Klesse said Tuesday.

Tight refining margins bit into the largest U.S. refiner's second-quarter results, with profit falling 67% as the cost of crude oil outpaced the price of gasoline. Margins, the difference between the price of the crude Valero must buy, and the products the refinery makes, have been squeezed by record high crude prices in the past quarter. Weak gasoline demand due to high prices has also put pressure on Valero's returns.

While total oil consumption is still increasing, the company forecasts continuing weak gasoline demand through 2009.

"You have to be lean, mean, and tough," Klesse said, speaking to analysts on a call that focused on Valero's efforts to maintain its financial solvency despite weak refining margins.

"We are eliminating a lot of things, and delaying a lot of things in our budget," Klesse said. The refiner has committed $4.5 billion to projects going into 2009, and plans a large investment at its Benicia, Calif. refinery, which is required by environmental regulations. After that, other projects may be trimmed down, Klesse said.

Projects that may be deferred include a para-xylene chemical project at the St. Charles refinery in Norco, La. Margins for that business may not justify Valero's entry at this time, Klesse said.

"We are in the middle of strategic planning, and also looking at the real world of the current cracks, and looking at our cash flows and maintaining our strategic efforts here," he said. Klesse said the company is reviewing each project in its portfolio, to decide whether it's viable at current margin levels.

While projects focusing on diesel may be seen as beneficial, since the fuel has been one bright spot for refiners recently, Klesse said Valero will focus on projects that will aid in exporting diesel, since the majority of demand growth is overseas. In the past quarter, Valero has sent diesel to Europe and South America, Klesse said.

The company will also cut back on operations at some of its plants, as necessary, Klesse said. "I think it's fair to say that cat crackers will continue to have reduced operating rates," Klesse said, referring to the primary type of gasoline production unit.

The company will instead strive to maintain its credit rating with the agencies, he said, calling the rating the "most important" thing for Valero to sustain. While Valero has always talked about maintaining shareholder value, the company's focus Tuesday on its viability as an investment vehicle was new, as Klesse repeated the importance of riding out a difficult time for the industry.

Source: Dow Jones Newswires

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