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Assessing ValueAct Capital Management's fourth quarter positions

Part 5
Assessing ValueAct Capital Management's fourth quarter positions (Part 5 of 8)

Why ValueAct Captial disposed its stake in Valero Energy

ValueAct Capital and Valero Energy

ValueAct initiated a new position in Dresser-Rand Group, Inc. (DRC). It sold its stakes in CF Industries (CF), The Mosaic Company (MOS), and Valero Energy Corporation (VLO). The fund increased positions in Allison Transmission Holding (ALSN) and MSCI Inc. (MSCI). It reduced its stake in Adobe Systems Incorporated (ADBE).

ValueAct Capital eliminated a position in Valero Energy Corporation (VLO) that accounted for 0.20% of the fund’s third quarter portfolio. Valero Energy Corporation, through its subsidiaries, is an international manufacturer and marketer of transportation fuels, other petrochemical products, and power.

VLO12Enlarge GraphValero recently said CEO Bill Klesse will step down from his role in May and will be replaced by CEO Joe Gorder. Klesse, who spent 45 years in the energy industry, recently said at the IHS CERAWeek energy conference that transportation fuels in developing countries will drive demand for oil despite shrinking use in the U.S. and other mature markets.

Valero saw its 4Q 2013 earnings increase 30% due to gains from the spinoff of gas-station retailer CST Brands, Inc. last year. Valero Energy posted a profit of $1.29 billion, or $2.38 a share, compared to a profit of $1.01 billion, or $1.82 a share, a year earlier. The company successfully completed the initial public offering of common units in Valero Energy Partners LP and plans to use this master limited partnership as the primary vehicle to grow its transportation and logistics assets.

Refining throughput volumes averaged $2.8 million barrels per day in the fourth quarter, which is an increase of 139,000 barrels per day versus the fourth quarter of 2012. Refining volumes were higher, primarily due to less maintenance activity and the initiatives of favorable crude discounts, particularly for light crude in the company’s Gulf Coast system. Differences in crude prices in the Gulf Coast enabled the company to expand its refining segment’s performance. From 4Q 2012 to 4Q 2013, Mars medium sour crude’s discount to Brent increased by $7.66 per barrel, and Maya heavy sour crude’s discount to Brent increased by $2.73 per barrel. Louisiana Light Sweet (LLS) prices increased by $8.39 per barrel, moving from a premium to a discount versus Brent.

The ethanol segment earned operating income of $269 million for 4Q 2013, attributed to strong gross margins driven by low industry ethanol inventories and a decline in corn prices, which combined with high quarterly average production volumes of 3.6 million gallons per day.

The company had reported a big drop in its 3Q sales as “third quarter refining margins were challenged.” Diluted earnings per share declined from $1.21 to $0.57 per share below Street estimates. The decline was attributed to lower light sweet and sour crude oil discounts, plus, lower gasoline and diesel margins. Moreover, operating income was impacted by higher costs related to compliance with the U.S. federal renewable fuel standard.

Why ValueAct Captial disposed its stake in Valero EnergyEnlarge GraphValero spokesperson Bill Day told Oil and Gas Journal that Valero plans to invest $730 million to upgrade two of its Texas refineries to process increased volumes of light crude sourced from the Eagle Ford shale in a project that is forecast to complete by year end 2015. With the upgrades, Valero hopes to capitalise from the “economically attractive and advantageously located” production of light tight oil (LTO) from North American shale plays.

Valero and other U.S. Gulf Coast refinery peers such Tesoro Corporation (TSO) and Phillips 66 (PSX) are poised to benefit from higher export prices and the availability of cheap crude along with pipeline infrastructure facilities.

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