3-Husky buying Valero Ohio refinery for $1.9 bln

Jeffrey Jones, CALGARY, Alberta, May 2 (Reuters) - Husky Energy Inc. is buying Valero Energy Corp.'s Lima, Ohio, refinery for $1.9 billion to secure processing capacity for its expanding Canadian oil sands operations, it said on Wednesday.

Husky, which is controlled by Hong Kong billionaire Li Ka-shing, is making good on plans to integrate early-stage oil sands projects such as its Sunrise development with a U.S. refinery to cut exposure to the raw crude's price swings.

The deal is expected to close in the next two months, the companies said, making Husky the third large Canadian oil firm to meld unconventional crude with U.S. processing capability.

Acquiring the 165,000-barrel-a-day Midwest refinery will add to Calgary-based Husky's cash flow and earnings right away, Chief Executive John Lau said in a statement.

"Integration of the Lima refinery with future growth of heavy crude oil and oil sands production is part of Husky's long-term strategy to enhance returns to shareholders by capturing the complete value chain," Lau said.

San Antonio, Texas-based Valero, the biggest fuel producer in the United States, picked up the refinery in its $8 billion takeover of Premcor Inc. in 2005.

It put the plant on the block in February, having decided to invest in its other assets rather than spend money on upgrading and expanding the facility, spokesman Bill Day said.

Husky, which has little long-term debt, was at the top of a list of oil sands developers speculated to be interested. Day declined to say how many companies submitted bids.

Valero will use the proceeds to buy back more of its stock later this year, Chief Executive Bill Klesse said.

Analyst Jeff Dietert of Simmons & Co. International said the deal looked positive for both companies as it appeared to be an attractive price for Valero while offering Husky cheaper refining capacity than it could hope to build in Canada.

Profit margins in refining have been unusually wide amid a shortage of capacity in Canada and the United States.

Husky is known for its dominant position in western Canadian heavy oil production and processing as well as its chains of Husky and Mohawk brand service stations.

While planning the 200,000 barrel a day Sunrise project in northern Alberta -- one of several on its drawing board -- it has sought a "downstream solution" for processing the oil.

With an industry-wide rush to build tens of billions of dollars worth of oil sands developments in Alberta, skilled labor has been stretched thin and materials prices have surged, forcing massive cost overruns.

Oil sands developers Suncor Energy Inc. (SU.TO: Quote, Profile, Research and EnCana Corp. (ECA.TO: Quote, Profile, Research have also acquired U.S. refining capacity, partly to skirt the overheated market.

Husky will operate the Lima plant as is, running conventional light oil supplies until it devises plans to convert it to process heavy crude and even expand the capacity, spokeswoman Tanis Thacker said.

The gooey, high-sulfur oil wrung from the oil sands must by upgraded into lighter crude so it can be turned into fuels.

"One of the things I'd worry about if I was Husky, (is) they are going to have to put a lot of new money into this to handle sour and heavier crude," said Glenn MacNeill, chief investment officer for Sentry Select Capital Management in Toronto, which has no shares in the company.

Husky is still considering other deals, too, Thacker said. The first phase of Sunrise is slated to start up after 2010.

Its shares jumped C$1.31 to C$85.56 on the Toronto Stock Exchange. Valero climbed $1.75 to $72.90 in New York. They announced the deal after markets closed.

(Additional reporting by Matt Daily and Scott Haggett)

($1=$1.11 Canadian)