Valero Energy (VLO) has been hit hard in the most recent selloff, falling as much as 42 percent from its April high. Valero has since recovered but I still see further upside.
Here are some elements I like about the Valero Energy story:
• Second quarter operating income was $1.3 billion versus operating income of $904 million in the second quarter of 2010.
• Second quarter throughput margin was $11.41 per barrel, which increased $1.84 compared to the same quarter in 2010. This was Valero's highest second quarter margin in 3 years.
• Margins on Gulf Coast gasoline increased 29% from $7.97 per barrel in the second quarter 2010, to $10.26 in the same quarter 2011.
• Gulf Coast ULSD versus LLS margins increased 16% for the second quarter 2010 to $11.49. So far in the third quarter, Valero is seeing its margins increasing further, averaging margins of about $13 per barrel.
• Valero benefits from WTI-type and Eagle Ford crude pricing, which are at a substantial discount to LLS. The discount helped 3 of its refineries that have crude oil priced at or below WTI. Valero plans to increase the use of discounted Eagle Ford crude.
• Oppenheimer recently upgraded Valero and expects another 60% upside.
I'm bullish on Valero and expect more upside. Valero plans to increase the amount of Eagle Crude used in its refineries. This will help grow revenues and margins going forward. Valero also plans to investment $3.5 billion to increase its refining capacity, which could add another $1 billion in operating income.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VLO over the next 72 hours.