Valero Energy: Hurricane Insurance For Your Portfolio?

Aug.30.12 | About: Valero Energy (VLO)

June 1st through November 30th marks hurricane season, with gulf refinery stocks like Valero Energy (NYSE:VLO) often finding themselves in the storm. This year is no exception with Hurricane Isaac being the latest hurricane to disrupt the Gulf coast - shutting down offshore oil and gas production along with onshore refineries that are typically closed so that workers along with their families can evacuate coastal areas. Hurricane Isaac closed 93% of the current daily oil production and two-thirds of the current daily natural gas production in the Gulf. Such closures inevitably lead to spikes in energy prices but what about buying a refinery stock like Valero Energy during hurricane season as a form of portfolio insurance or for that matter, buying it now for the long-term?

Valero Energy is the world's largest independent petroleum refiner and marketer, with 16 refineries and 10 ethanol plants stretching from the U.S. West coast and Gulf coasts to Canada, the United Kingdom and the Caribbean - meaning one hurricane won't completely shut the company down. Hurricane Isaac did close its 270,000 bpd St. Charles and 135,000 bpd Meraux, Louisiana refineries during Isaac, but the rest of the company's refineries stayed open.

Other energy companies that were impacted by Hurricane Isaac include oil giants BP (NYSE:BP), Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A) as they had to evacuate non-essential workers from offshore rigs or close onshore refineries, plus the refineries of Marathon Petroleum (NYSE:MPC) and Phillips 66 (NYSE:PSX) were also closed. But, these stocks are usually in the eye of any Gulf hurricane with Katrina being by far the worst as it knocked out production at 10 refineries for some time with some of these refineries being severely damaged.

It's worth mentioning that other oil refinery stocks with refineries that are not in the path of Gulf hurricanes would include HollyFrontier (HFCP), Tesoro (NYSE:TSO) and Western Refining (NYSE:WNR).

Is a Global Refinery Footprint Enough of a Reason to Invest?

So is Hurricane Isaac and hurricanes in general knocking out Gulf refineries a good enough reason to invest in Valero Energy with its global refinery footprint? Certainly it appears that any refinery disruption can help it.

The Monday before Hurricane Isaac made landfall, Valero Energy rose over 5%, and not just because of the hurricane, but also because of an oil refinery fire in Venezuela. Specifically, an explosion at the Amuay Refinery, which is part of the massive Paraguaná Refinery Complex that refines close to 1 million barrels of oil a day, put the refinery out of action. And while Venezuela said that there would be no disruption in oil exports, there was a small spike in gasoline futures in the U.S. (also in part due to Hurricane Isaac), while Wall Street seemed to interpret that Valero Energy would be the primary benefactor in part due to its size, and also because it has a 235,000 bpd refinery off the coast of Venezuela in Aruba.

But, there are obviously other fundamentals that investors must consider with refinery stocks besides disruptions from hurricanes and refinery fires. In the case of Valero Energy, investors should note that the stock has a rather high debt load (compared with its peers) of just above $7 billion, according to Yahoo! Finance. And while Valero Energy was trading roughly at book value with $1.3 billion in cash and $4.08 billion in operating cash flow around the time Hurricane Isaac hit, having $7 billion in debt does mean that investors will need to keep an eye on margin trends as any decrease in margins could impact the company's ability to service that debt or otherwise maneuver itself.

As the biggest refiner in the world, Valero Energy had a market cap approaching $17 billion near the end of August when Isaac hit. That means it's probably not going to be a takeover target any time soon and investors might want to question the stock's potential for more upside as it's already up more than 45% for the year - meaning it's not exactly a value play. Likewise, Valero Energy's forward dividend of $0.70, for a dividend yield of 2.30%, is not bad in today's low interest rate environment, but that dividend is not particularly juicy enough for investors who need income.

But, one thing that could further move Valero Energy is an announcement at the end of July (when earnings were reported) that the company intends to separate its retail business from the rest of the company. To achieve this, Valero Energy is reviewing several potential separation transactions that would include a tax efficient distribution to shareholders but more importantly, it will free up the company to focus on its core refinery business and become more efficient.

The Final Verdict: Valero Energy

Thanks to a global refinery footprint, Valero is well positioned to ride out and benefit from any refinery disruption, whether due to hurricanes like Isaac or for other reasons like refinery fires. Hence, and if you are a trader who believes that something will disrupt the refining industry, trading Valero Energy could be a safe bet.

On the other hand, if you are a value investor looking for significant upside potential, you should probably be looking at other refinery stocks with smaller market caps that might also be acquisition targets by bigger energy players as they would offer faster upside growth. With that said, a more conservative investor looking for a refinery stock might be comforted by Valero Energy's sheer size compared to its peers. Valero Energy may not be the most exceptional energy or refinery play out there for investors, but it's certainly above average and well worth a closer look depending upon your trading or investment goals.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.