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Summary

  • Valero Energy Corporation is the biggest refiner in the U.S. with 16 refineries and a throughput capacity of ~2.9 million bpd reflecting 12% of the entire U.S. refining capacity.
  • The oil and gas boom credited to shale production has amplified volumes especially at Eagle Ford and Bakken in North Dakota.
  • Valero has good prospects due to the increased shale outlook in the U.S. with many refineries in high profit regions such as the Gulf Coast and Mid-Continent.

Valero Energy Corporation (NYSE:VLO) is the one of the giants in the oil refining and marketing industry. It is in fact the biggest refiner in the U.S. with 16 refineries and a throughput capacity of ~2.9 million bpd reflecting 12% of the entire U.S. refining capacity.

Valero's Performance

Full year 2013 revenues were ~$138 billion down from ~$139 billion. However net income grew from $2,083 in 2012 to $2,720 in 2013.

The company posted an EPS of $1.78 in Q4 2013 compared to the $1.82 of the same quarter last year. The operating income remained flat at $1.6 billion as depressed results in the refining segment were offset by increases in its ethanol segment.

Dividends of $0.25 per share were announced for Q1 2014 up from $0.23 in the previous quarter. The company continues to show commitment towards its shareholders and maintains an attractive dividend yield of 2.03%.

Valero Profiting from Growing Crude Production

The oil and gas boom credited to shale production has amplified volumes especially at Eagle Ford and Bakken in North Dakota. Valero will capitalize on this opportunity as it already has a wide presence in this vicinity especially in the Gulf Coast. Production from these regions has risen by ~700,000 bpd in the past year.

Natural gas production went up as high as ~67 billion cubic feet per day in 2013 while crude oil production peaked at ~7,500 MBPD in 2013 expected to grow even higher in the coming period.

The excessive supply of oil has reduced WTI prices giving access to cheaper crudes for U.S. refineries. Valero is utilizing this opportunity and will focus on its profitable regions adding more refineries to the Gulf Coast and the Mid-Continent region particularly in Houston and Corpus Christi. The two units will begin production in 2015 with a focus on gasoline and diesel production, the higher margin products.

Source: Valero Presentation

Source: Valero Presentation

Growth in Pipeline Business to Drive Growth

The TransCanada pipeline that transports oil from Cushing, Oklahoma to the Gulf Coast just recently began operations with a total capacity of 830,000 bpd. Valero has entered into a contract with the company to use 20% of the pipeline's capacity until 2030 giving Valero access to low-price crudes.

Similarly the Seaway Crude Oil Pipeline Company LLC increased its capacity earlier from 150,000 bpd to 400,000 bpd. In the coming quarter, the company plans to increase its capacity further by 450,000 bpd to a total of 850,000 bpd. All in all we will observe a total increase in capacity of 1,400,000 bpd from Cushing to the Texas Gulf Coast in 2014.

The Flanagan South Pipeline will also increase capacity by 600,000 bpd by mid-2014 and transports oil between southwest Chicago and Oklahoma.

This will benefit Valero by increasing the crack spread even more and creating a bigger differential between the U.S. WTI oil prices and the international Brent oil prices.

Focus on Higher Margin Products

The company has increased its focus on the distillate (diesel, kero, jet fuel) market. Distillate margins are considerably higher than gasoline due to limited production capacity and excessive demand.

The margins for diesel were as high as ~$16 in 2013 while gasoline margins were only ~$12.2. Expected growth in 2014 for diesel also grew at a much more rapid rate by ~1.5x the gasoline demand.

Valero is also heavily investing to increase its export capacity in diesel and gasoline. The company targets a growth in gasoline exports from ~225 to ~250 MBPD and a growth in diesel from ~325 to ~450 MBPD.

Hydrocracking Increasing Distillate Production

Port Arthur hydrocracker capacity was increased to 60 MBPD. In 3Q 2013 a new Diamond Green Diesel JV Plant was started with a capacity of 10 MBPD. Additionally 50 MBPD hydrocracking expansion projects are underway and will enhance capacity in the Meraux unit by 20 MBPD in early 2015 while 15 MBPD will be increased at both Port Arthur and St Charles hydrocracker units by 2018.

Heavy Expenditures on Logistics and Processing Segments

Realizing the huge potential in transporting and the processing of oil, the company has allocated a major portion of its capital expense, 72% of the $1.525 billion expense, to these segments.

Source: Valero Presentation

Upgrading its Logistic Services

Valero purchased 5,320 rail cars that will be delivered between 4Q 2012 - 2Q 2015. Two thousand of these vehicles were already received by Feb 2014.

New crude rail unloading terminals are in schedule with the terminal at St Charles expected in 1Q 2014. The terminal at Port Arthur is expected in 4Q 2014 and the terminal at the West Coast refinery is on track to be completed in 2015.

Further improvements are in the process of being developed at Quebec and will improve capacity for crude oil. The company will also increase its exports to Canada through the Corpus Christi dock that will be completed by 3Q 2014 and tanks are planned to start in 1Q 2015.

Looking Ahead

Valero has good prospects due to the increased shale outlook in the U.S. with many refineries in high profit regions such as the Gulf Coast and Mid-Continent. The company is investing heavily in its logistics business and the processing of crude oil that are its high margin segments. Valero is also focused on increasing its distillate production and other processed end products and plans to increase its exports out of the U.S. as crack spreads are expected to widen.

Moreover the growth in the pipeline business, advancements in Valero's logistic services, and focus on the processed end products will enhance the company's product mix and continue to induce investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.

Source: Valero Energy Corporation: Prospects For Growth