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02 Feb 2010
Approximately $6 billion of debt affected
New York, February 02, 2010 -- Moody's Investors Service changed Valero Energy Corporation's (Valero)
rating outlook to negative from stable. We also affirmed Valero's
existing Baa2 senior unsecured note ratings.
The move to a negative outlook reflects the ratings risk if, over
the next twelve months, down-cycle weakness fails to recover
sufficiently to be compatible with Valero's leverage and ratings.
If it appears that second and third quarter 2010 margins, which
are normally strong with the summer driving season, will instead
be comparable to last year's weak second and third quarter margins,
the ratings may be placed under review for downgrade. Other items
that would be a drag on the current ratings would be negative free cash
flow and rising debt levels. At this point, if the ratings
do require adjustment, we believe that our long term view of the
refining sector would support continued investment grade Valero ratings.
"Valero's ratings remain supported by still ample expected
2010 liquidity as well as the earnings power of its refining portfolio
should second and third quarter 2010 refined product margins modestly
seasonally recover and vital oil price differentials modestly improve
from present ranges", said Moody's Vice President and
Senior Credit Officer Andrew Oram. "However, to be
certain to protect the ratings, true cyclical refined product demand
recovery and a significant re-widening of crude oil quality price
differentials may be required this year".
The ratings are also supported by Valero's large operating scale,
solid diversification of unscheduled downtime within its 15 refinery portfolio
(2 of which have been shut down) and regional margin risk, comparatively
high process complexity which would drive sound earnings if and when crude
oil price differentials widen, material earnings contribution from
Valero's gasoline and diesel retailing and ethanol operations,
leverage on complex refining capacity that remains in investment grade
ranges, and very wide coverage of Valero's lone bank loan
covenant (Debt/Total Capital).
Valero's comparatively high proportion of deep conversion capacity
enables it to process substantial proportions of historically significantly
cheaper lower quality crude oils into high proportions of high value transportation
fuels and low proportions of loss making heavy by-products.
Valero is also one of the few U.S., refiners with
sufficient hydrocracking capacity to significantly increase diesel production
for export to stronger diesel markets and correspondingly decrease gasoline
production in need. However, reduced oil price differentials
and weak diesel margins have been negating these complexity advantages.
Furthermore, while the existing ratings anticipated an average refining
down-cycle, the current down-cycle is considerably
more severe and longer than expected. Valero's leverage also
did not decline as far as expected before down-cycle. As
margins collapsed, Valero was in the midst of heavy capital spending
and it also suspended its large asset divestiture program due to a weakening
market for refining assets. While Adjusted Debt/Capital declined
to 26.7% by third quarter 2008, weakening operating
income and large non-cash tangible and intangible asset write offs
moved leverage to 38% by year-end 2009. However,
while the important Adjusted Debt/Complexity Barrels has risen too,
it remains in the low investment grade range. Moody's envisions
very weak first quarter 2010 results, likely a fourth consecutive
quarter of operating losses after depreciation.
Valero's non-refining assets have contributed significantly.
Its large retail network generated its second highest earnings in 2009
and Valero added third leg of diversification with its 2008 and 2009 acquisitions
of financially distressed ethanol production capacity. Ethanol
earnings have been fairly substantial so far, though we view ethanol
margins to be highly volatile and of uncertain long term durability.
The last rating action for Valero was on October 8, 2008,
when Moody's upgraded Valero to Baa2 from Baa3.
The principal methodology used in rating Valero was Moody's Rating Methodology
for the Global Independent Refining and Marketing Industry published in
December 2009 and available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Valero Energy Corporation is headquartered in San Antonio, Texas.
Valero is the largest most diversified independent refiner in the U.S.
Corporate Finance Group
Moody's Investors Service
Moody's changes Valero's outlook to negative
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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