Valero Energy (VLO) operates as an independent petroleum refining and marketing company. Valero's headquarters are in San Antonio, Texas. The company has a market cap of $17.4 billion and a stock price of around $32; it is a company on the rise. The company's year-over-year second-quarter earnings increased by 12%, and since 2003, the company's compound annual growth rate (CAGR) is 13.14%.
Valero is the world's largest independent petroleum refiner. The company owns 16 United States refineries and 10 ethanol plants. Valero has grown to its current size and has been able to increase its earnings through acquisitions. The oil refining business is cyclical and when business is bad, "oil refineries are often a drag on the profits of integrated oil & gas companies." Valero takes advantage of the cyclical nature of the refinery business and purchases refineries for cheap when the large integrated energy companies like BP (BP) decide that they need to sell their refineries. Valero spokesman Bill Day said "Valero has grown through acquisitions," Mr. Day then went on to note that all but one of its plants existed before the company purchased them.
Valero has learned through experience that the more crude oil they refine, the more money the company will make. As Valero opens more and more refineries, its capacity grows, as does its profits. Valero has embraced the "more is better" philosophy, and in 2011, it bought two refineries. The first was on August 1st when it purchased the Murphy Oil (MUR) refinery in Louisiana. The purchase price was $625 million. The second was on October 1st when it purchased the Chevron (CVX) refinery in Pembroke, Wales. The purchase price for the refinery was $1.73 billion. There are now rumors that Valero is interested in buying BP's refinery in Texas. This is the type of deal that Valero seems to like. BP wanted to sell the refinery for $2.58 billion, but might have to settle for around $1 billion. "The average price of U.S. refineries sold since 2009 indicates the plant should sell for ~$1B, a valuation that would be among the lowest in two decades." As a result of the Deepwater Horizon oil spill disaster, BP may have to pay a settlement that could be as high as $25 billion. With the prospect of having to pay such a large settlement, BP has been forced to sell assets for less than they want. If Valero could buy the Texas City refinery for $1 billion it would be a tremendous victory.
Recent Valero News
On September 27, it was announced that Valero Energy Corp would be selling its retail business, which operates gas stations and convenience stores. The sale would be made through an auction, and Valero hopes to net more than $3.5 billion. The sale has lured the interest of private equity firms such as TPG Capital LP and the Carlyle Group. Convenience store chains such as Alimentation Couche-Tard and 7-Eleven are also rumored to be interested. This move is part of Valero's plan to concentrate on its core refinery business.
On September 27, The Street wire service reiterated their buy rating on Valero "with a ratings score of A-. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, increase in net income, and attractive valuation levels. We feel these strengths outweigh the fact that the company shows low profit margins."
On September 26, Valero Energy Corp said its "planned work on the crude unit at its 270,000-barrels-per-day Pembroke refinery in Britain was under way. The other units at the plant were being idled even though the crude unit was the only one being worked on, a company spokesman said. Earlier this year, the company said it planned an eight-week turnaround at the refinery, beginning in October."
On September 3, Valero Refining Company-Aruba N.V., a subsidiary of Valero notified employees of the Valero Aruba Refinery that Valero has decided to further reduce operations and reorganize the site as a refined products terminal. "We believe that Aruba has the assets to compete as a world-scale crude and refined products terminal," said Valero Chairman and CEO Bill Klesse. "With both deepwater berths and smaller berths, the terminal will have the flexibility to load the very largest crude ships."
On August 30, Valero announced that it would restart operations at its Linden ethanol processing plant within the next few weeks. The plant was closed due to the effect of high corn prices. Corn is on one of the main ingredients that is used in the production of ethanol, and a recent drought drastically reduced the corn harvest thus pushing prices higher. The plant was closed in June along with another plant in Albion, Nebraska after Valero executives decided that high corn prices lowered margins and warranted the action.
As the largest petroleum refiner in the United States, Valero is in a strong position moving forward. The company has consistently grown both its revenues and its profits. Investors have taken notice of Valero's earnings and have bid up the stock price by 79% over the last 52 weeks. But, even after the run up, the stock continues to rally and is up by 19% over the last two months. Despite the stock's price increase, the valuations (price to earnings ratio 10.9/price to book ratio 1.07) are still quite reasonable. Valero's is not the only refiner whose stock price has rallied, for instance Tesoro (TSO) stock price has moved higher by 123% over the last 52 weeks and Western Refining (WNR) stock price has moved higher by 107% over the last 52 weeks. The stock prices of the refiners have run up quite a bit and could be primed for a correction. I would advise against buying Valero at this price, but would reconsider if there is a correction in the stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.