The View on Valero

Motley Fool analyst's take on San Antonio company's upcoming retail spinoff

SAN ANTONIO -- Valero Energy Corp.'s anticipated spinoff of its 1,800-location Corner Stores convenience chain as a separate publicly traded company, expected to occur within the first half of 2013, "offers plenty of promise," according to a post by Motley Fool Blog Network analyst Mike Thiessen.

Following in the footsteps of ConocoPhillips and Murphy Oil, this new entity appears poised to compete more aggressively against larger refiners as well as integrated majors like ExxonMobil, he said.

Murphy Oil is in the process of completing its own spinoff. The company has committed to separating its exploration-and-drilling arm from its retailing-and-refining arm. ConocoPhillips spun off Phillips 66 last year to separate its refining business from the production/exploration business.

In a world that is increasingly dominated by integrated conglomerates, smaller firms like Murphy and Valero may have no choice but to slim down and focus more narrowly on core operations, said Thiessen.

Valero's current shareholders will collectively receive an 80% stake in the Corner Stores business. As of yet, an offering price has not been set for the new company. The refiner will retain a 20% stake in the company.

Valero is a mid-major gasoline refiner and retailer. Unlike its larger rivals, it does not engage in large-scale exploration and drilling activities. Instead, it concentrates on refining and selling the petroleum products that it sources from various sites around the Western Hemisphere. In addition to its soon-to-be-independent Corner Stores brand, the company operates thousands of additional retail stores under several brand names. It employs nearly 22,000 people and earned $1.1 billion on $138.3 billion in revenue in 2011.

Corner Stores will be a major regional c-store chain. With nearly 2,000 stores and plans to expand that number by several dozen per year, the company is expected to claim revenue of several billion dollars after becoming independent. With more than 750 stores, it will have a sizable presence in the Canadian c-store market, as well.

There appear to be few roadblocks that stand in the way of this deal, Thiessen said. Although the results of Valero's petition to classify the spinoff as a tax-free distribution are still pending, there is no evidence to indicate that the petition will be denied. The deal will require the approval of Valero's current board of directors. This is not expected to be a problem, he said.

It is important to note that Valero is not exiting the c-store business. The company still operates a number of retail food mart locations at its Diamond Shamrock, Ultramar, Beacon and Shamrock gas stations across North America. After the Corner Stores spinoff, the company will still operate about 5,000 retail outlets of various sizes.

Valero clearly wishes to refocus its efforts on the refining and gasoline-retailing components of its business, Thiessen said. Its shareholders appear to agree that the company could benefit from this strategic shift: Since the official late-July announcement of the spinoff, the company's shares have risen from about $25 per share to interim highs near $36 per share. Investors who bought into the company shortly after the announcement have realized a return of more than 45% over the past six months.

The company has launched some novel new promotions, including offering free music downloads with drink purchases. Its loyalty program has millions of subscribers across the American South and Midwest. Finally, it has mounted an aggressive acquisition campaign that has added hundreds of existing stores to its portfolio during the past several years.

Without significant amounts of debt, both Valero and Corner Stores appear well-positioned for the future, Thiessen concluded.

San Antonio-based Valero Energy, through its subsidiaries, is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. Assets include 15 petroleum refineries with a combined throughput capacity of approximately 2.8 million barrels per day, 10 ethanol plants with a combined production capacity of 1.2 billion gallons per year, and a 50-megawatt wind farm. Approximately 6,800 retail and branded wholesale outlets carry the Valero, Diamond Shamrock, Shamrock and Beacon brands in the United States and the Caribbean; Ultramar in Canada; and Texaco in the United Kingdom and Ireland.