In my piece 3 Reasons Valero Is Less Attractive Than Peers, published in March, I argued that other refining stocks such as Western Refining Inc (WNR), Tesoro Corp (TSO), and Holly Frontier Corp (HFC) were better picks than Valero Energy Corporation (VLO). As shown by the chart below, since my piece was published, VLO has significantly underperformed its peers since March. While the long-term concerns mentioned in my previous article remain, I think VLO is a better trade than its peers right now.
Valero Has Lagged
VLO has not just underperformed its peers, VLO has underperformed by a significant margin. While VLO has moved up by 2%, WNR and TSO have surged by about 30% each. Because VLO as a company is not all that different than WNR & TSO, I think it is difficult to argue that market fundamentals have changed enough to warrant a 30% divergence between VLO and some of its peers.
VLO recently announced that its St. Charles refinery in Norco, La., shut down on August 10, will return to service by the end of August. The company owns and owns and operates 16 refineries so the re-opening of one refinery can have a significant impact on earnings.
Retail Operation Spin-Off
At the same time as VLO announced second quarter earnings, the company also said it was planning to spin-off its retail business in a tax-efficient way. This should be good for shareholders of VLO as each company will be able to focus on its core business.
VLO recently announced a slight increase to the dividend. Following the dividend hike, VLO now pays an annual dividend of 70 cents per share or 2.45%. Comparably, WNR yields 1.22%, TSO yields 1.23%, and HFC yields 1.52%. For VLO, the combination of lagging stock performance and an increase of the dividend has led to widening gap between VLO's dividend and peer dividends.
Previous Concerns Remain
It should be noted that the concerns that I pointed out in my previous article, low short interest, high debt, and the lack of takeover potential have not changed. However, given the recent underperformance and upcoming short-term catalyst, I think VLO can work as a trade. That being said, VLO would not be my favorite long-term pick in the sector.
While I had previously favored other names over VLO such as WNR, TSO, and HFC, I think it is time to reconsider VLO for a trade because the stock has underperformed other refinery stocks by so much.