Valero has evolved into top refiner
It didn’t have a smooth path to its perch among biggest U.S. companies
SAN ANTONIO — Valero Energy Corp., now the world’s largest independent refiner, was born out of a maelstrom of lawsuits and settlement talks during what a former mayor called the “energy wars” of the 1970s.
It wasn’t an auspicious beginning for a company that last week moved up to No. 9 on the most recent Fortune 500 list, its highest-ever placement.
Valero’s roots grew out of the 1970s energy crisis. At a time when San Antonio used natural gas to fire its power plants, the natural gas subsidiary of Houston’s Coastal Corp. jacked up prices, enraging city officials and residents.
“I personally was very angry,” former Mayor Lila Cockrell said. “I heard heartbreaking stories. People told me they had to choose between buying groceries and paying their light bill.”
The city sued. Settlement talks dragged on. After years of wrangling, Cockrell got her wish that the Coastal subsidiary be spun off and reborn as a new company based in San Antonio. It would be headed by Coastal executive Bill Greehey, an Iowa native educated at St. Mary’s University.
Since the 1979 spinoff, Greehey, an outsized personality and bold leader, transformed Valero from Texas’ largest intrastate pipeline company into North America’s largest refiner.
In 2006, Greehey ceded the
CEO reins to Bill Klesse, a less flashy but exacting Valero executive.
Under Klesse’s leadership, Valero’s 2012 revenue of $138.3 billion earned it a spot on the Fortune 500 top 10. The company now has 16 refineries, 10 ethanol plants, 10,500 employees and a wind farm.
The company’s Houston-area presence is significant. Its Houston refinery has 450 full-time employees, and its Texas City refinery has 480 full-time employees. That doesn’t include contract workers.
Valero’s Gulf Coast holdings also include a refinery in Port Arthur.
The company is planning to build units called crude toppers at both its Houston and Corpus Christi refineries.
Those projects, expected to cost between $220 million and $280 million at each, will allow the refineries to process even more domestic crude oil, including the type being produced in the Eagle Ford Shale of Texas, into gasoline, diesel and jet fuel.
“The investment is a sign of Valero’s confidence that refining along the U.S. Gulf Coast can thrive even in a very competitive global refining situation,” company spokesman Bill Day said. Spinoffs
Valero has also produced offspring, including two spinoffs — pipeline company NuStar Energy LP, also a Fortune 500 company, which Greehey serves as chairman, and CST Brands.
The latter, which runs gasoline station/convenience stores, including 188 in Houston, was separated from Valero on May 1 and is expected to win a place on the Fortune 500 list next year.
Now there’s the prospect of a third spinoff. Klesse has said Valero may form a master limited partnership that might include its pipelines, terminals and rail cars.
Yet it hasn’t always been smooth sailing for Valero. It has suffered quarterly losses in a notoriously volatile business, where the seesawing price of oil — what refiners buy to make fuels — directly affects profit margins.
Greehey’s strategy was to build sophisticated units at some plants that could process heavy crude oil that was cheaper to acquire than light, sweet crude.
“It was our sour crude discounts that made us more profitable than everybody else,” he said.
Greehey also went on an acquisition spree. By the mid-1990s, refining was at the bottom of a cycle, and refineries were cheap.
“We could buy at 10 cents on the dollar,” Greehey said. Buying from Exxon
The turning point for Valero came in 2000, when it bought Exxon’s Benicia plant in Northern California, its most profitable refinery. Exxon had to sell the plant when it bought Mobil.
“By the time we closed that transaction, gasoline margins in California had more than doubled,” Greehey said. “That allowed us to buy UDS.”
With its $6 billion purchase of Ultramar Diamond Shamrock — another San Antoniobased refiner — on Dec. 31, 2001, Valero added six refineries to its portfolio. The deal vaulted Valero to second place behind Exxon Mobil Corp. for U.S. oil refining capacity.
“I thought Greehey was a fantastic businessman,” said Fadel Gheit, managing director and senior energy analyst at Oppenheimer & Co. in New York. “But having said that, I think they went overboard with acquisitions.
“At the end of the day, it’s a very tough business, with a lot of regulation and politics in it. … Volatility is the norm in the refining business, not the exception.”
When Valero bought Ultramar Diamond Shamrock, Klesse, then UDS executive vice president of refining, joined the Valero fold.
Klesse “has done a good job, considering the industry environment in the first five years of his tenure,” Gheit said. “He was greeted by strong industry margins, and then in 2008 the party was over” as the global recession led to declining demand for fuels. Down years
Valero suffered through difficult years in 2008 and 2009. Demand for its products plummeted and its profit margins evaporated.
“Our cash was going out the door,” Klesse said.
Valero addressed its problems by shutting a refinery and selling two others, in addition to borrowing money. It took advantage of others’ distress by buying ethanol plants on the cheap.
“We were trying to have an asset base that we felt we could compete with,” Klesse said.
In the past two years, “things have improved significantly,” Gheit said, and Valero has capitalized on opportunities.
He praised Klesse’s decision to spend $3 billion in the past three years to build two refining units called hydrocrackers, which break down heavy crude oil into lighter products including diesel and gasoline. One is operating now, and the second will be fired up this year.
Hydrocrackers will boost Valero’s production of diesel fuel, which Gheit said earns higher profits than gasoline and is the fastest-growing in terms of demand. “He’s making good investments.”
Klesse’s heir apparent, Joe Gorder, was named Valero’s president and chief operating officer Jan. 1. Gorder has been praised by a Valero board member as having strong leadership skills and working well with people.
vvaughan@express-news.net