By Jack Barnes
The latest stock market pullback has given value investors a chance to go shopping again -- and Valero Energy Corp. (VLO) is a great example of the kind of steals that are available. That is, Valero's assets are worth significantly more than what the market is currently pricing them at.
At its core, the company is a vertically integrated, independent crude refiner with ethanol production that can be blended into the feedstocks of its own network of gas stations. Right now is the perfect time to be grabbing assets on the cheap, and Valero is giving us an opportunity that's too good to pass up. So it's time to buy Valero.
What the Market Missed
The market, in its haste to get out of its energy exposure in May and June, has mispriced some excellent companies. I believe that Valero is a perfect example -- especially since the company's stock was further dented by the news that industrialized nations, led by the United States, would open up their crude reserves in a concerted effort to lower oil prices.
Lower oil prices will actually help Valero's refining business, as the company will benefit from elevated gasoline crack spreads during the peak driving season. That's the benefit of having an asset base as diverse as that of Valero - a company that has refining capacity as well as retail and wholesale assets.
Indeed, with 14 crude refineries in the United States, Canada, and Aruba, Valero is one of the largest independent refiners in the world. The company had a template run rate of about 2.6 million barrels of oil per day before it started a series of asset sales to lower debt levels and boost efficiency. Valero now has production capacity of about 2 million barrels per day.
Furthermore, Valero's refineries are capable of processing the harder to refine grades of oil. That means the company can refine the heavier, sour grades of crude, and then sell it at a discount to light sweet crude oil. This gives Valero a higher profit margin per barrel processed.
But that's not all. Valero also has more than 5,000 retail and wholesale distribution points, which means it can capture all of the value-added markups of crude oil from the end of the pipeline to the gas tank. mIt also has 1.1 billion gallons of annual ethanol capacity that it can mix with its gasoline feedstock. That makes Valero a full vertical product producer.
The company generated $89 billion in revenue over the last 12 months, with $3.6 billion in EBITDA (earnings before interest, taxes, debt and amortization). At current market prices, Valero is trading below book value per share, which gives a patient value investor a safety buffer.
Valero is a vertically integrated independent crude refiner with ethanol production that can be blended into the feedstocks of its own network of gas stations. The market is undergoing a significant pullback in what has been a long and tired bull market. That means patient investors have an opportunity to pick up solid assets at a discount.
So let's snag 50% of our wanted exposure now at market prices, and put in a low-ball limit order at $20.00 for the other half. Remember, this is for patient investors looking to buy assets at prices cheaper than their tangible value.