The largest oil refiner in the U.S., Valero Energy Corporation (VLO), is deferring its search for overseas acquisitions following the decline of an acquisition stake in a Netherlands refinery.
The company had sought acquisition of Dow Chemical’s (DOW) 45% interest in the TRN refinery for an enterprise value of approximately $725 million. But the refinery’s major stake holder, Total SA (TOT), turned down Valero’s offer by exercising its right of first refusal. Valero wanted to confine the European diesel market by capturing this acquisition opportunity.

On the other hand, yesterday, the company closed one of its refineries in San Nicolas, Aruba, indefinitely. Despite the refinery’s capability of processing low-cost heavy sour crude oil, it was suffering from low product margins.

These factors point to our weak outlook for near-term refinery margins and a growing list of medium- to long-term challenges. Weak refined product demand and excess capacity, both in the U.S. as well as globally, are expected to cap margin gains. These factors are expected to weigh on the fortunes of all refining players in general and Valero in particular.

With the outlook for domestic refiners remaining bleak, we see little reason for investors to own the stock as the ongoing long-term fundamental changes in the industry suggest future struggle. We therefore maintain our Underperform rating.
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