July 31, 2012 / 2:07 PM / 6 years ago

UPDATE 4-Valero to split off retail arm, profits rise

* Planning likely spin-off of retail business
    * Q2 profit $1.50 per share vs $1.30 a year earlier
    * Shares up 6 percent
    * Q2 profit tops Street

    By Matt Daily and Anna Driver
    July 31 (Reuters) - U.S. refining company Valero Corp
 o n T uesday posted a higher quarterly profit that topped
expectations and said it would split off its retail business,
lifting its shares 6 percent.
    The company, which owns retail stations in the United States
and Canada, said it is considering different methods for the
split, including a spin-off that would give its shareholders
ownership in the retail business.
    "This aligns perfectly with what investors want to see from
Valero right now, which is return of capital and liquidity
events. That's why it is being met with a positive response,"
said Dahlman Rose & Co analyst Sam Margolin, who rates the
shares a "Buy."
    Retail businesses similar to Valero's trade at higher
valuations than refining companies, so spinning off the stores
will help unlock value. Valero's retail business has an
enterprise value of around $3 billion to $4 billion, analysts
    Valero will keep its wholesale fuel marketing business and
shed its stores that sell gasoline and convenience store items
like soda and candy bars, marking a departure from some of its
peers like Tesoro Corp who are growing retail
    "We are the manufacturing company with a wholesale marketing
business," Valero Chief Executive Officer Bill Klesse told
investors on a conference call. "We are not going to be selling
Twinkies and beer and cigarettes. We are going to leave that to
the retail group."
    Retail outlets are typically viewed as an outlet for fuels
produced at a company's refineries. Those stores allow refiners
to keep utilization rates up even when demand slows, a situation
that puts them at an advantage to competitors without stores.
    "Valero isn't going to have that guaranteed offtake, but it
sounds as if they can make it up with their wholesale business
and exports," Allen Good, analyst at Morningstar, said.
    Valero operates nearly 1,000 U.S. stores, with a heavy
concentration in Texas. In Canada, it has 775 units, the company
    Credit Suisse Securities (USA) LLC is advising Valero in
connection with the retail split, which is expected to take 6
    San Antonio-based Valero reported a second-quarter profit of
$831 million, or $1.50 per share, compared with $745 million, or
$1.30 per share, a year earlier.
    Analysts on average had expected a profit of $1.43 per
share, according to Thomson Reuters I/B/E/S.
    "In the refining segment, throughput and cash operating
expenses performed better than company guidance," analysts at
energy investment bank Simmons & Co told clients in a research
    Valero said its retail arm reported record quarterly
operating income of $172 million, up from $135 million a year
earlier, or about 12.6 percent of its second-quarter profit.    
    The company also raised its quarterly dividend by 17 percent
to 17.5 cents per share.
    Shares in Valero rose 6 percent to $27.72 in New York Stock
Exchange trading.
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