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Valero Exiting the Retail Business

October 02, 2012 | About:
Oil refiner Valero (VLO) plans to exit the retail business by auctioning off its gas station and convenience stores segment. The segment consists of nearly 1,000 locations in the U.S. and nearly 800 in Canada. The auction could fetch as much as $3.5 billion, as private equity firms and major convenience stores loom as the likely bidders, Bloomberg reports.

We’re actually a bit surprised by the move, but we think it has some interesting consequences. Traditionally, gas stations have provided a natural buyer and channel for refined gasoline, especially during times of weak demand. However, we think this move signals Valero’s confidence that the refining business doesn’t need the predictable earnings stream and distribution network of gas stations to balance its highly cyclical nature. Demand for petrochemicals, lower natural gas costs, and the resurgence of the domestic oil industry may be leading to higher trough period margins for the industry.

Though there aren’t many synergies between running a refinery and running a convenience store, we like the ability to distribute gasoline through an established channel. We’re also fans of the strong earnings that result from the convenience store business model. In other words, we’re not very excited by its plans to pursue the auction.

We’ll continue to monitor new developments, but at this time, we believe Valero’s shares are fairly valued. Our favorite name in the space is Phillips 66 (PSX), which we received in the portfolio of our Dividend Growth Newsletter when it was spun off from ConocoPhillips (COP).

About the author:

Valuentum Securities
Valuentum Securities Inc. is an independent investment research provider, offering premium equity reports and dividend reports, as well as commentary across all sectors/companies, a Best Ideas Newsletter (spanning market caps, asset classes), a Dividend Growth Newsletter, business/investing book reviews pre-public release, modeling tools/products, and more. Independence and integrity remain our core, and we strive to be a champion of the investor. Valuentum is based in the Chicagoland area.

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