Laws Against Price Gouging

[Kidlicious]

Originally posted by Kontiki


To be clear, Fortune categorizes the totality of Exxon et al as "Oil Refining", not just their actual refining operations. So any data presented for such companies is inclusive of their production, refining, retail and all other operations.

I think the profits of companies like Valero are more telling. Valero's profit growth is much more than Exxon's.

[Flubber]

Originally posted by Kidicious
Here's another stat. Valero's profits increased by 99% in 2005. Small base? I don't think so. They made quite a bit in 2004 also. 99% is amazing. They are projected to have a very large increase in 2006 also.

Lets see

- they had acquired 14 refineries since 1997 through end of 2004 for 9 billion with an estimated replacement cost of 43 biillion!!!

- They attribute most of their profitability to the discounts they get in purchasing heavy sour crude.

Valero has gone from 1 refinery in 1997 to 18 today! Sorry if I don't see their profit increase numbers as indicative fo much of anything on an industry basis.

Do you intentionally cherry pick numbers? valero is probably by far the top performing refiner right now. They have made a business out of picking up older refineries on the cheap and using their expertise to improce them

[Flubber]

Originally posted by Kidicious



We aren't talking about a single project. We are talking about a general tendency to invest in new capacity.

Err what do you think makes up that general tendency?

Why its projects !! Each and every refinery project will be assessed on its own merits and investors won't care so much that a 1 billion return is 1 % of the company's 100 billion in assets or whatever. The numbers they care about are the return on the incremental investment

[Kidlicious]

Originally posted by Flubber


Lets see

- they had acquired 14 refineries since 1997 through end of 2004 for 9 billion with an estimated replacement cost of 43 biillion!!!

- They attribute most of their profitability to the discounts they get in purchasing heavy sour crude.

Valero has gone from 1 refinery in 1997 to 18 today! Sorry if I don't see their profit increase numbers as indicative fo much of anything on an industry basis.

Do you intentionally cherry pick numbers? valero is probably by far the top performing refiner right now. They have made a business out of picking up older refineries on the cheap and using their expertise to improce them

Well I didn't refer to 1997. I refered to between 2004 and 2005. Nice try though, NOT!

[Kidlicious]

Originally posted by Flubber


Err what do you think makes up that general tendency?

Why its projects !! Each and every refinery project will be assessed on its own merits and investors won't care so much that a 1 billion return is 1 % of the company's 100 billion in assets or whatever. The numbers they care about are the return on the incremental investment

I'm sure they do Flubber. I don't argue that. But the fact is that when you have humongous ROE in an industry, people are looking to invest there. They will look harder at specific projects.

[Flubber]

Originally posted by Kidicious


I think the profits of companies like Valero are more telling. Valero's profit growth is much more than Exxon's.

and you couldn't have picked a worse poster child for new capacity.

Valero's claim to fame is that others want out of refining so they pick up assets cheap. Its apparently a successful strategy but not something that will bring any new capacity anywhere. Valero has huge profit growth since in part they have increased their stable of assets at the same time as refining margins have risen. heck they added 4 refineries in 2005 to go from 14 to 18

[Kidlicious]

Originally posted by Flubber
Valero's claim to fame is that others want out of refining so they pick up assets cheap.

Why? Obviously, Valero is making very good investments, and the others are stupid.

[Flubber]

Originally posted by Kidicious


I'm sure they do Flubber. I don't argue that..

Good

Originally posted by Kidicious


But the fact is that when you have humongous ROE in an industry, people are looking to invest there.

Certainly ROE is a big factor in people investing in a particular stock-- No question-- never would dispute that

Originally posted by Kidicious


They will look harder at specific projects.

The "investors" for a refinery project would largely be made up of the senior managers of the biggies and the proponents are likely to have to compete with every other opportunity that is competing for capital-- You don't just need to be a good opportunity-- you need to be better than the other projects competing for capital


Ahhh-- a post of kidicious that I didn't disagree with with every fibre of my being

[Kidlicious]

Originally posted by Flubber
Certainly ROE is a big factor in people investing in a particular stock-- No question-- never would dispute that

Yes, it's also a big factor in buying a company, because it means that the company is very profitable compared to the investment. It also means that it would be very profitable to start a company in that industry. It also means that if you are in that industry you may very well make more profit if you expand.

The "investors" for a refinery project would largely be made up of the senior managers of the biggies and the proponents are likely to have to compete with every other opportunity that is competing for capital-- You don't just need to be a good opportunity-- you need to be better than the other projects competing for capital

And that's why I showed you the numbers for the oil production industry. The refining numbers are even bigger.

[Flubber]

Originally posted by Kidicious


Why? Obviously, Valero is making very good investments, and the others are stupid.

I don't know the others motivations but I have been perusing Valero's annual reports and they are quite explicit about the fact that they feel they picked up the assets cheaply.

It is possible that the prices were discounted quite a bit for potential environmental liabilities.

That happens with wells sometimes. You sell a well for a crap price and the purchaser looks like a genius for a year or three or ten as they reap HUGE returns. Then the environmental bill comes and turns the project into a loser. I have seen it happen. I have also seen it happen where the enviromental problem was not as bad as was feared and the purchaser reaps a great reward

Perhaps Valero has more risk tolerance for contingent environmental liabilities . . . perhaps they have some mitigation techniques to lessen these costs etc etc. But at this level of dollars it is rarely the case that someone was simply stupid (although it does happen). Its usually more about variations in how companies do risk analysis-- or sometimes its just a strategic decision if a company thinks they are better at something else

[Kidlicious]

Originally posted by Flubber
Perhaps Valero has more risk tolerance for contingent environmental liabilities . . . perhaps they have some mitigation techniques to lessen these costs etc etc. But at this level of dollars it is rarely the case that someone was simply stupid (although it does happen). Its usually more about variations in how companies do risk analysis-- or sometimes its just a strategic decision if a company thinks they are better at something else

The additional refineries are probably just more profitable for Valero, because of their structure. But of course Valero is going to say that they got them for cheap. They aren't going to say that they paid too much for them. Not unless they start having financial problems anyway.

[Flubber]

Originally posted by Kidicious

Yes, it's also a big factor in buying a company, because it means that the company is very profitable compared to the investment. It also means that it would be very profitable to start a company in that industry. It also means that if you are in that industry you may very well make more profit if you expand.

You did see the bit where Valero acquired for 9 billion that which it would take then 43 billion to build. http://www.valero.com/Investor+Relat...nnual+Reports/ -- its in their 2004 annual report. So would not valero have almost 4.5 -5 times the rate of return on those assets than the new builder??

Your logic falls down when you assume that the returns for a new refinery would be anywhere at all similar to the returns for an industry with a bunch of 20 to 50 year old refineries.

[Kidlicious]

Originally posted by Flubber


You did see the bit where Valero acquired for 9 billion that which it would take then 43 billion to build. http://www.valero.com/Investor+Relat...nnual+Reports/ -- its in their 2004 annual report. So would not valero have almost 4.5 -5 times the rate of return on those assets than the new builder??

Your logic falls down when you assume that the returns for a new refinery would be anywhere at all similar to the returns for an industry with a bunch of 20 to 50 year old refineries.

Yes, they will get a very high return on that, but that is just one refinery. The return on that one refinery is not going to affect the industry average significantly.

[Flubber]

Originally posted by Kidicious




And that's why I showed you the numbers for the oil production industry. The refining numbers are even bigger.

Depends what numbers you are looking at--

I know of an oil company that has instructed its people not to drill any wells where the ROI is less than 30%-- The last ROI number I saw you post on refineries was 18%.

PLus a well or oil project might get you revenue in 2-3 months. A refinery ?? First revenue is when ?? 15 years?

[Flubber]

Originally posted by Kidicious


Yes, they will get a very high return on that, but that is just one refinery. The return on that one refinery is not going to affect the industry average significantly.

First off its ALL their refineries-- Fourteen at the time they wrote it-- First of all it was their book value of 9 billion versus a replacement cost of 43 billion.

Second they had 12 percent of US refining capacity as at the end of 2004-- It would be more at the end of 2005 since they bought four more refineries.


Still think they don't matter to the industry averages?