Valero Buying Premcor

Valero (VLO Quote) agreed to acquire Premcor (PCO Quote) for $6.9 billion in cash and stock.

The deal, which offers Premcor holders a 20% premium to the average trading price of their stock over the last month, will create North America's largest oil refiner. The combined company would have daily capacity of 3.3 million barrels and annual revenue of $70 million.

"This transaction is one of the largest and most strategic acquisitions in Valero's history," said Valero chief Bill Greehey. "We are acquiring several very strategic refineries for significantly less than their combined replacement value, and we'll be improving the profitability of these plants by capturing synergies, improving their reliability and yields, and increasing their capacities."

Premcor holders will end up with about a quarter of the combined firm. The companies said they expect the deal to be accretive to earnings and cash flow in the first year. Valero said the deal should close Dec. 31.

Valero has been among the major winners with the last year's run-up in crude oil prices. The company's stock has surged nearly 150% since last spring. Premcor has performed solidly if less spectacularly, adding more than 50% over a year ago.

Valero has pointed to its ability to process discount-priced crude oil as a major reason for a recent run of record quarterly earnings. For months, TheStreet.com has also highlighted this capability when presenting Valero as an underappreciated stock.

On Friday, Valero closed at $75.04, and Premcor finished at $59.