UPDATE 3-Valero shares sink after Reliance says no bid

Mon Oct 31, 2011 3:01pm EDT

* Valero shares down nearly 7 pct

* Reliance wants to "dispel the rumors"

* Shell not a likely buyer -analyst

* Valero due to report Q3 earnings Tuesday

By Anna Driver

Oct 31 (Reuters) - India's Reliance Industries said it has no plans to buy Valero Energy , news that sent the U.S. refining company's shares down nearly 7 percent.

Companies typically do not comment on market speculation, but Reliance said it was taking the step because of the materiality of the rumored deal.

"Reliance wishes to dispel the rumors and announce that it is not in discussions with Valero nor otherwise considering an acquisition of Valero," Reliance, owner of the world's largest refining complex, said in a statement on Monday.

Reliance said it would not comment further.

Last week, Valero's shares climbed 13 percent in a rally fueled by a report in The Daily Mail that the refiner was being sought after by both Reliance and Royal Dutch Shell .

A number of large oil companies including BP Plc and ConocoPhillips are scaling back exposure to the refining sector. As a result, there are a number of plants on the market in the United States, where Valero is the largest independent refiner.

"The reality is, the current environment for mergers and acquisitions has been really limited," Ann Kohler, an analyst at CRT Capital Group, said.

Shell, which already owns or has an interest in six refineries in the United States, may also run into regulatory problems with a bid for Valero, Kohler said.

The Northeast market, where there are three refineries for sale, is especially tough. The plants process more expensive Brent crude oil and would require hefty investment to be able to process cheaper oil.

A spokesman for Valero, which is due to report third-quarter earnings on Tuesday, declined to comment on Reliance's statement. A representative for Shell also declined to comment.

Shares of San Antonio-based Valero were down 6.7 percent at $24.90 on Monday afternoon on the New York Stock Exchange, off an earlier low at $24.38. The stock posted its largest one-day decline in about two months.

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