Valero Rehabs Balance Sheet

Move to split retail from oil refining may let company pay off debt.

Valero Energy Corp.’s plan to cleave its convenience stores and gas stations from oil refining may allow the company to bolster its balance sheet by paying off debt and abandoning a business with narrowing profit margins.

The largest U.S. refiner by processing capacity aims to leave its retail unit with a comparable debt load to peers and keep investment-grade ratings for the remaining business. A dividend to the parent from the spinoff combined with reduced capital spending would let Valero pay off about $480 million of bonds due next year and leave the retailing business with about $750 million of debt, according to Gimme Credit LLC.

‘Credit Positive’

“I don’t see the retail company taking 10 percent of the debt with it; I think they’re going to take more,” Alan Shepard of Madison Investment, whose firm in Madison, Wisconsin, oversees about $16 billion of assets and owns Valero bonds, said in a telephone interview. While “the shifting of debt off to the retail company is a credit positive for Valero,” the risk that refining margins may deteriorate makes the spinoff plan credit neutral, he said.

‘Stable Part’

The split may hurt the company’s credit by removing “the most stable part of Valero’s earnings and cash flows,” Moody’s Investors Service analysts led by Gretchen French wrote yesterday in a report.

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