Valero Steps Outside US With Netherlands Refinery Buy

Valero Energy took a long-awaited plunge into Europe's refining market by agreeing to acquire a stake in a Dutch plant for about $725M. In its first foray outside of North America, Valero, the largest independent refiner in the U.S., would buy the 45% stake from Dow Chemical, which is divesting assets to pay down debt. However, it is unclear whether France's Total SA, operator & majority owner of Total Raffinaderij Nederland NV, will exercise its right of first refusal on the shares. San Antonio-based Valero's looked to buy refining assets abroad - especially in Europe - as a way to enhance its operational flexibility & to diversify as the U.S. gov't. moves to strengthen regulations pertaining to emissions of global warming gases. The deal is expected to close in the 3rd-Q. While Europe's refining sector, like that of the U.S., faces the challenges of waning fuel demand due to the economic downturn, some assets there are desirable due to the region's focus on distillates, a category used to describe some fuels such as diesel & jet fuel. Many refining analysts see distillates as the engine of global growth in fuel, while demand for gas, that is used in the U.S. more than anywhere else, will remain flat or decline. "Valero's clearly positioning its system to meet long-term global demand for distillates," said Chi Chow, analyst with Tristone Capital. In addition, fuel trade across the Atlantic Ocean is robust, & with operations on the ground, Valero will have a better vantage point from which it can predict and capitalize on changing market conditions. Mark Gilman, analyst with the Benchmark Company, suggested this acquisition can be a precursor to buying the remaining shares of the refinery from Total. Valero hasn't been able to find any meaningful way to expand in the U.S. "In large measure, it's a default-type of philosophy," he said. Valero's purchase comes as refining asset values have tumbled from highs seen in 2006 & 2007 together with refined-product prices and demand. Valero CEO Bill Klesse hinted at the deal in April following the release of 1st-Q earnings. "The markets shifted dramatically. Acquisitions with the proper hardware in the right location are attractive," he said. The Netherlands refinery has a processing capacity of 190,000 barrels a day and the ability to process a variety of feedstocks into diesel and jet fuel. Total will continue to operate the refinery with input from Valero's management. For Dow Chemical, the sale is another step in its quest to cut the $9.23B in short-term debt it incurred to buy rival Rohm & Haas earlier this year. It has already sold Rohm & Haas' profitable Morton salt unit for $1.68B, and issued debt and equity for that purpose.