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Home » Finance Current Affairs » Refining Capacity Rates Could Fall To 70%-Range

Refining Capacity Rates Could Fall To 70%-Range

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Valero Energy Corp. (VLO) is seeing signs that U.S. gasoline fundamentals are improving but that domestic refineries may have to cut operations even further to preserve margins, Chief Executive Officer Bill Klesse said during an investor presentation Wednesday.
 
 The U.S. recession appears to be bottoming out, with growth in 2010, Klesse said during a presentation at Barclays Capital2009 CEO Energy Conference. An economic recovery will spur demand for gasoline, diesel, jet fuel and other refined products as well as expand refining margins, he noted.
 
 The refining industry could see utilization - a percent of a refiner's capacity used to process crude oil - drop to the 70% range from the low 80% range currently in order to bolster margins amid lower demand.
 
 Klesse pointed to distillates as a growth business in a recovery, but noted that there is a lag between the stimulus money being doled out around the world and how that is affecting various economies.
 
 Valero is the largest independent refiner in the U.S., with capacity to process 3.1 million barrels per day at 16 plants stretching from California to Canada and to the Caribbean.
 
 Klesse called the uptick in recent gasoline demand positive. Overall, U.S. gasoline demand is down 1.9% in 2009 while distillate demand is down 13.6% from year-ago levels. The supply ofU.S. gasoline is slightly above levels seen over the past four years, but Valero's presentation noted that refiners aren't overproducing.
 
 The economic environment is still tough and Klesse said the company's priority is to focus on the balance sheet to improve its profitability. "Our coking margins are marginal," he said. Valero typically profits from the price difference between heavy, sour crude oil and premium light, sweet crude. But the differential has collapsed to a mere $3 this year from around $20 a year ago.
 
 As such, "our near-term profitability is challenged," and is driven by volumes, Klesse told Wall Street analysts and investors at the conference. In the long run, as the price differential widens again, Klesse said he expects Gulf Coast refineries will start processing Canadian crude oil once the pipelines are built.
 
 To offset these pressures, the company has been reducing spending - by $200 million annually for the last three years, he noted. Some of these measures are simple, such as not turning on garage lights at 2 a.m., which saved $600,000 a month.
 
 The company, he said, has plenty of liquidity with $1.6 billion in cash at the end of June. "We have a very good balance sheet."
 
 Meanwhile, Klesse lamented that Valero lost the bid to purchase Dow Chemical Co.'s (DOW) 45% stake in Total SA's (TOT) Total Raffinaderij Nederland refinery to Lukoil Holdings (LUKOY), mainly because of its hydrocrackers, a key unit to process heavy crude. Valero, he noted, had delayed construction of two hydrocrackers. After carefully evaluating the market, Klesse said "we don't see other opportunities like that today." Valero isn't seriously considering any acquisitions in the refining or ethanol space, he said. However, "we are looking at opportunities in the animal-fat area" as a low-cost biodiesel option, he said.
 
 Valero shares were recently down 31 cents, or 1.7%, at $18.43. The stock is down 46% over the past 12 months.
 
 -By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com
 
 Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=IWJ9Rzh%2Bo3ZofNHHrKq1ng%3D%3D. You can use this link on the day this article is published and the following day.
 



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