Why Valero stock fell
Valero Energy (VLO) stock fell 10.3% on Friday, October 19. That same day, Goldman Sachs downgraded the stock from a “neutral” to a “sell.” On Thursday, Valero announced the acquisition of its midstream MLP, Valero Energy Partners (VLP).
Also on October 19, the US Gulf Coast WTI 3-2-1, the benchmark crack, fell 4.8% to $15.70 per barrel. PBF Energy (PBF), HollyFrontier (HFC), and Marathon Petroleum (MPC) fell 9.9%, 7%, and 6.2%, respectively, that day. Phillips 66 (PSX) and Delek US Holdings (DK) fell 5.8% and 2.2%, respectively.
Acquisition of Valero Energy Partners
Valero announced that it will acquire Valero Energy Partners (VLP), its MLP, in a cash deal. Valero Energy will pay $42.25 per share for VLP’s outstanding common shares, for a total of $950 million. That’s a 12.4% premium over VLP’s 30-day average price (volume weighted) as of October 17. The acquisition is expected to close as soon as possible, subject to requirements. After the acquisition, Valero Energy Partners will be Valero Energy’s wholly-owned subsidiary and cease to trade publicly.
Most refiners use the MLP structure to grow their midstream segments through dropdowns and acquisitions. MLPs can leverage their balance sheets to fund expansions without affecting the refiner’s financial strength. MLPs also enjoy certain tax benefits.
The transaction will change the way Valero Energy goes forward with its midstream segment. Valero seems to have the financial strength in terms of debt and liquidity to make structural changes.
Changes in analysts’ ratings and target prices
Goldman Sachs’s downgrade of Valero Energy stock might be in anticipation of Valero’s third-quarter earnings, which it expects to release on October 25. Cowen and Company lowered its target price for the stock from $148 to $137.