Valero shutters refinery, takes charge

Reuters
November 20, 2009

Valero Energy Corp., the top U.S. independent oil refiner, said on Friday it will permanently shut down its plant in Delaware City, Delaware, as the weak economy batters the refining sector.

The San Antonio-based company said it would take a pretax charge in the fourth quarter of $1.7 billion US to $1.8 billion, or $2 to $2.15 per share after taxes, related to the shutdown, including severance for cutting 550 jobs at the plant.

Slumping fuel demand due to the economic recession and higher crude oil costs have squeezed margins for U.S. refiners this year, forcing companies to idle plants and scale back production of refined fuels, such as gasoline, diesel and heating oil.

"At the Delaware City refinery, the refinery itself has, so far in 2009, lost more than $1 million per day," Valero spokesman Bill Day said.

Valero said the shutdown of the 210,000-barrel-per-day plant would reduce 2010 pretax operating expenses by about $450 million, including $125 million of non-cash costs, and trim capital spending and turnaround costs by about $200 million through 2010.

Valero has been among the most aggressive companies in shuttering units this year amid plunging margins. In August it closed its 235,000 bpd refinery in Aruba for an indefinite period.

The company had sought but failed to find buyers for both refineries.

"We have no plans at this time to announce any other shutdowns. We have said previously, several times, that we are taking a good hard look at all of our refineries throughout our system and working to identify ways that we can cut costs," Day said.

Shares of Valero climbed 0.7 percent to $16.49 per share at 12:12 p.m. ET on the New York Stock Exchange. Those shares have fallen 23 percent this year.

Refiners operated at 79.4 percent of their total capacity as of last week, the lowest rate since September 2008, when refinery utilization dropped following Hurricane Ike, according to Department of Energy data.

"If there's ever been a time to mothball a refinery, it's probably now, with utilization rates below 80 percent. I wouldn't be surprised to see additional closures," said Peter Beutel, president of consultancy Cameron Hanover in New Canaan, Connecticut.

Valero said it would begin severance negotiations with the United Steel Workers and International Brotherhood of Electrical Workers unions, which represent the employees at the plant.

The Delaware refinery processed heavy and sour crude oil grades, which typically trade at a discount to the light, sweet crude oil that is known as the benchmark in the United States.

The cost advantage of those sour crudes has declined this year, hurting profits for refiners like Valero that have invested billions of dollars in units to process those cheaper crude grades.

"I look at this as a business-specific decision, versus anything in regards to market conditions. You might get some pruning at least at the return on investment refineries by other players," said Chris Jarvis, an analyst at Caprock Risk Management in Hampton Falls, New Hampshire.

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