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. Last Updated: 07/27/2016

Top Refiner Born in $7Bln Deal

London -- Valero Energy, the top performer this year in the Standard & Poor's 500 Index, agreed to buy Premcor for $6.9 billion in cash and stock to become the largest refiner in North America.

Valero, based in San Antonio, will issue $3.5 billion in stock and pay $3.4 billion in cash, the companies said today in a Business Wire statement. Premcor investors can receive 0.99 Valero share or $72.76 in cash for each share, 19 percent more than Friday's closing price of $59.

The acquisition adds four refineries and boosts Valero's capacity to 3.3 million barrels per day. U.S. refiners are reaping windfall profits as rising demand spurs gains in fuel prices and widens margins.

No new refineries have been built in the United States in 30 years, and rising demand helped push gasoline prices to all-time highs this month.

"We are acquiring several very strategic refineries for significantly less than their combined replacement value," Valero chief executive Bill Greehey said in the statement. "We'll be improving the profitability of these plants."

The profit refiners get from making a barrel of crude oil into gasoline and heating oil averaged about $9 so far this year, up from about $4 on average during the 1990s.

The margins will keep climbing in coming months as fuel consumption increases, Morgan Stanley analyst Doug Terreson predicted in an April 1 report.

Valero is today the third-largest U.S. refiner by crude oil processing capacity, behind ExxonMobil and Conoco Phillips. Premcor's chairman, Thomas O'Malley, and its chief executive, Jefferson Allen, previously built Tosco, which they sold to Phillips Petroleum for $8.37 billion in 2001.

O'Malley, who owns 1 million Premcor shares, according to data compiled by Bloomberg, was brought in by the buyout firm Blackstone Group in February 2002, ahead of an initial public offering in April of that year.

Blackstone, based in New York, had a 21 percent stake in Premcor as of the end of last year, down from 80 percent around the time of the initial share sale.

Valero shares nearly doubled last year and Premcor stock rose 62 percent as they benefited from their investments in equipment to handle less expensive, high-sulfur oil, known as sour crude.

Greehey spent more than $1 billion the past two years adding capacity to process sour crude, which is cheaper than low-sulfur oil used by such rivals as Sunoco.

The availability of sour crude climbed as Venezuela, Canada and Saudi Arabia, the world's largest oil exporter, pumped more. Most refiners still favor lower-sulfur oil, called sweet, such as Nigeria's Bonny Light.

U.S. refiners "are competing for relatively scarce supplies of sweet crude," O'Malley said in an Oct. 28 interview.

High-sulfur Maya crude from Mexico this year will average $15.20 per barrel less than the sweet, West Texas Intermediate grade, the U.S. benchmark, Terreson said. The difference was $11.34 last year. The spread between light sweet crude and heavy sour "is likely to remain at record levels," he said.