Among Refiners, Rivals' Loss Is Valero's Gain

Some well-positioned refinery companies are making a bundle on the cast-off assets of others.

Take Valero (VLO), for instance. Yes, the company has benefited mightily from the record run in energy prices over recent months. Though crude's latest surge knocked the wind out of the stock market Thursday -- setting off a 7% plunge in Valero's own shares -- oil's rise has driven a 45% jump in Valero stock this year.

But some observers say that it's more than energy-price inflation that is boosting the fortunes of the San Antonio refiner and marketer.

Notably, the company snatched up a valuable refinery from troubled El Paso (EP) early this year. It paid $365 million, or just 15% of the estimated replacement cost, for an asset that boosted earnings immediately. In contrast, El Paso spent nearly twice that amount just to upgrade the refinery -- enabling it to process even the roughest crude oil -- over the past five years.

"Valero is fortunate to acquire this refinery at an attractive price," Valero CEO Bill Greehey said when announcing the deal in February. "What's more, this refinery is a great fit for Valero, because it processes heavy, sour crude oil, which typically sells at a big discount to sweet crude."

The transaction is noteworthy, not just for its salutary effect on Valero. Some observers say the rise in oil prices this year suggests that some sellers of refineries over the last year were all too eager to part with valuable assets.

"El Paso seems to get in and out of businesses at the worst times," said former Coastal executive Frank Powell. "It's like a core competency with them."

Wrong Direction?

By now, El Paso has shed all three of the major refineries it inherited through its 2001 merger with Coastal. Dissidents who last year sought control of the company -- many of them former Coastal employees -- claim they would have held on to the refineries through the current upswing instead. They describe the refinery sale to Valero, which is now enjoying record profits, as just another example of El Paso's questionable business decisions.