U.S. Markets open in 2 hrs 27 mins

Valero Energy Partners Prices IPO

Zacks Equity Research

Valero Energy Corporation (VLO) announced that its subsidiary Valero Energy Partners LP (VLP) has priced its initial public offering of 15 million common units at $23 per common unit. Further, the underwriters have been given a 30-day option to purchase up to an additional 2.25 million units from the company.

The offering is expected to close on Dec 16. During the closure of the offering, public will own a 25.5% limited partner interest in Valero Energy Partners, or a 29.4% limited partner interest if the underwriters exercise in full their option to purchase additional units. Valero, through some of its units, will own the remaining limited partner interests in Valero Energy Partners, as well as the 2% general partner interest.

Valero Energy Partners LP was formed to operate pipelines and terminals for the transportation of crude oil and refined petroleum products. Assets in the partnership include crude and refined-products pipelines and terminals in three systems, which serve Valero's Port Arthur refinery, its McKee plant in the Panhandle and its Memphis refinery.

Valero is moving ahead with the formation of the master limited partnership (MLP) owing to significant financial benefits. An MLP can raise money from the bourses but is taxed only at the unit holder level. These are exempted from paying corporate income taxes.

Valero is the largest independent refiner and marketer of petroleum products in the U.S. It has a refining capacity of 3 million barrels per day across 16 refineries located throughout the U.S., Canada and the Caribbean.

Valero spun off 80% stake of its retail arm – CST Brands Inc. (CST) – through a tax-advantaged distribution to shareholders, to unlock value in May 2013. The spin-off generated an immediate net cash benefit of $500 million, after $220 million were shelled out in taxes. We feel the move would help the company to concentrate on its industry-specific strategies.

We remain upbeat on Valero for the remainder of 2013 and foresee attractive opportunities that will position it uniquely among refiners to grow earnings and cash flow per share going forward. Additionally, Valero’s string of growth projects and operational improvement will drive free cash flow generation this year. However, second quarter earnings and revenues fell on an annual basis, due mainly to lower refining margins in each of the company’s regions and higher refining operating expenses.

Valero holds a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months. Meanwhile one can look at better-ranked players in the energy sector like Ferrellgas Partners LP (FGP) which sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on VLO
Read the Full Research Report on FGP
Read the Full Research Report on CST
Read the Full Research Report on VLP

Zacks Investment Research