Is Valero A Long-Term Investment Opportunity?
- Valero posted strong results in the second quarter due to higher throughput volumes in the refinery segment and better margins in the ethanol segment.
- Valero has begun implementing strategies to supply incremental volumes of cost-advantaged crude oil.
- However, its margins would be adversely affected in the coming quarters, as the price difference of sour and sweet crude oils to Brent crude oil is narrowing.
- The company intends to have one of the highest cash returns among its peers by growing regular dividends at a sustainable rate, returning excess cash through stock buybacks.
How Does Valero Stack Up Against Its Competition Marathon And Tesoro?
- The energy sector has had a history of market outperformance.
- Many energy stock plays pay dividends in addition to capital appreciation opportunities.
- Valero, Marathon Petroleum and Tesoro are all stocks worth considering.
- The growing demand of liquids in the U.S will support the growth for Valero over the next few quarters.
- Ethanol business has been able to report strong growth numbers due to a decrease in corn prices and favorable ethanol prices.
- EIA sees further growth in liquids demand and HGL, which will allow the refiners to continue growth over the next few quarters.
Valero Energy - Implications Of Narrowing Price Gap Between WTI And Brent
- The analyst firm Oppenheimer reiterated an outperform rating for Valero but lowered its price target from $70 per share to $65 per share.
- With the Department of Commerce’s recent step allowing two companies to export crude condensate, the refining industry expects to report lower earnings.
- The shrinking gap between WTI and Brent crude oil will also play a part in lowering the expected margins.
- Owing to the company’s lucrative position in the U.S Gulf Coast the company is well positioned to benefit from the growing production growth in the U.S.
- Valero will continue to benefit from increased oil production in the United States and Canada.
- Valero is incredibly diversified, and has set itself up for success in the changing landscape of refining.
- By spinning off many of the volatile portions of its business and becoming more contract based, Valero has drastically reduced risk and improved its continued profitability.
- Valero has had a very tough month, declining some 15% due to a Commerce Department decision on oil exports and somewhat reduced guidance.
- However, the Commerce Department has just put that decision on "hold", and the company just delivered a very solid earnings report and increased its dividend payout.
- The shares look cheap here and I look for North America's largest refiner to recapture a good portion of its recent decline.
Why Valero Energy Is A Great Buying Opportunity In A Good-Yielding Stock
- Valero is poised to benefit from the growth in U.S. and Canadian shale development, and from the lower U.S. natural gas price.
- After the retreat in its stock price, it is now an excellent opportunity for long-term investment in VLO at a cheap price.
- VLO’s stock is ranked second among all S&P 500 stocks yielding more than 2%, according to Portfolio123’s "ValueRank" powerful ranking system.
- Valero is generating strong free cash flows, and it is accelerating cash returns to shareholders through buybacks and dividends.
Why Valero Is Falling, And Why It Represents A Strong Value Play
- Valero fell 10% last week due to a change in the restrictions on certain oil exports by two US based companies.
- While the initial drop in price is understandable, the large extent of the fall in price is unwarranted.
- Valero has strong financial metrics, showing it as a good investment for the value investor.
- The recent fall therefore represents a strong entry point to purchase shares at a discount.
Valero Energy: When Will The Semi-Annual Double-Digit Dividend Growth End?
- Free cash flow may grow by high single digit CAGR over the next few years.
- Free cash flow and continued share buyback can continue to support the current dividend growth pace in near term.
- As both free cash flow and earnings dividend payout ratios continue to rise, dividend growth has to slow down.
- Given the current state, I estimate that a sustainable dividend per share growth would be around 8%.
- Dividend yield on cost may rise to 4% in 5 years.
- The refinery sector is getting hammered Wednesday as regulators have decided to allow some exports of ultralight oil.
- This is a huge over reaction for a variety of reasons outlined below and is a great entry point for longer term value investors.
- Valero is a great buy here due to its valuation and is already getting a significant amount of sales from exports.
Valero: Leading Refiner Seems Cheap And Attractively Positioned, But Untimely
- Valero will live and die with refining margins, and refining margins are very low historically right now, so current profitability is probably normalized or understated.
- 10%-11% earnings growth seems reasonable, and if so, that plus the 1.8% dividend yield makes the stock look very cheap.
- Above all moving averages and 73% off its 52-week low, the stock looks far too untimely for entry at this price.
- Valero Energy Corporation’s impressive Q1 FY 2014 results made analysts at Cowen and Company and Barclays raise their price targets on the stock.
- This growth in the company’s bottom line was supported by higher refining throughput margins and volumes receiving support from the cheap U.S. shale oil supply due to improvements in infrastructure.
- Looking forward, further growth in the North American crude production is expected that will support the company and help it to increase its production as oil infrastructure improves.
- The company is also investing to improve its transportation facilities and refineries to process more crude oil, while Latin America presents an attractive market to supply refined oil products.
- Valero is also expanding its ethanol operations, which will support the company’s sustainability even if favorable circumstances in the wider refining industry start to fade.
- In the last 2 months, insiders have been aggressively selling Valero stock at prices much lower than where the stock trades today. Time to take profits!
- Market is at all time highs.
- Questionable upgrade by Oppenheimer.
Valero Energy: Focused Refinery Player Offers Both Value And Growth Prospects
- Valero has embarked on a focused and shareholder value creating strategy in recent years.
- Structural changes in the US energy industry and shale boom create strong tailwinds.
- There might be more upside, but be careful about the cyclical nature of the industry.
Valero Energy: Double-Digit Dividend And Share Buyback Growth To Drive Value
- Trading at about a 10% discount to refining peers, Valero is priced inexpensively relative to its quality refining assets, solid growth and profitability profile, and promising cash distribution growth.
- Operating cash flow is expected to experience healthy growth over the next few years as Valero continues to benefit from domestic crude differential and cost advantage on ethanol business.
- With fairly conservative assumptions, Valero is expected to comfortably increase both dividend and share repurchases at double-digit growth rates over the medium term.
Valero Energy Corporation: A Long-Term Buying Opportunity In A Dividend Stock
- Valero is a rare combination of value and growth dividend stock.
- Although the stock price has risen 62.0% since the beginning of 2013, it is still an excellent buy right now.
- Valero benefits from the growth in U.S. and Canadian shale development.
- The higher global distillate demand is another growth driver for the company.
- Lower-cost North American natural gas also provides competitive advantage and upgrading opportunities.
Valero Energy Corporation: Prospects For Growth
- Valero Energy Corporation is the biggest refiner in the U.S. with 16 refineries and a throughput capacity of ~2.9 million bpd reflecting 12% of the entire U.S. refining capacity.
- The oil and gas boom credited to shale production has amplified volumes especially at Eagle Ford and Bakken in North Dakota.
- Valero has good prospects due to the increased shale outlook in the U.S. with many refineries in high profit regions such as the Gulf Coast and Mid-Continent.
Fri, Aug. 29, 9:10 AM
- Valero Energy (NYSE:VLO) has restarted production at a corn ethanol plant in Indiana that was shuttered more than two years ago by its previous owner.
- VLO bought the plant in March from Aventine Renewable Energy Holdings for $34M, boosting the number of its ethanol plants to 11.
- The plant is expected to boost VLO’s ethanol production to 1.3B gallons/year, putting it behind only Archer Daniels Midland and Poet LLC in ethanol production.
Thu, Aug. 21, 11:35 AM
- Plains All American Pipeline (PAA -0.5%) announces plans to construct a 440-mile pipeline from its Cushing, Okla., terminal to Valero's (VLO +0.2%) Memphis refinery, to provide capacity of up to 200K bbl/day of domestic sweet crude.
- PAA expects total project investment of ~$900M and completion in late 2016.
- PAA says the Diamond pipeline project is underpinned by a long-term shipping agreement with VLO and a related contract for storage and terminalling services at the Cushing terminal.
- VLO holds an option until Jan. 2016 to become a partner in the pipeline and purchase a 50% interest.
Mon, Aug. 18, 3:25 PM
- Valero Energy (VLO +2.3%) has dropped 3% during the past three months and has underperformed its closest peers Marathon Petroleum (MPC +1.6%) and Phillips 66 (PSX +2.1%), but Morgan Stanley’s Evan Calio and Manav Gupta think it’s time for a turnaround.
- While MPC, PSX and Exxon Mobil (XOM +0.2%) have major planned turnaround scheduled for Q4, VLO will be operating at a meaningfully higher utilization rate and is best positioned to capture any widening Gulf Coast differentials resulting from high turnaround activity, the analysts say.
- In addition to VLO's Q4 earnings revision upside, the firm estimate VLO has $800M in MLP-able EBITDA, including organic growth projects, which can be dropped into Valero Energy Partners (VLP +0.7%) in the foreseeable future.
Wed, Jul. 30, 8:42 AM
- Valero Energy (NYSE:VLO) +1.2% premarket after Q2 earnings and revenues beat Wall Street expectations, as VLO's refining segment reported higher volumes and operating income.
- Q2 refining throughput volumes averaged 2.7M bbl/day, an increase of 115K bbl/day from the year-ago quarter, due primarily to less turnaround activity and higher utilization rates spurred by the availability of discounted North American light crude oil on the U.S. Gulf coast.
- Refining operating income rose 18% Y/Y to $1.08B, reflecting higher volumes and bigger discounts on certain kinds of oil, which the company had projected earlier this month.
- The ethanol segment's operating income nearly doubled to $187M, boosted by higher margins related to lower corn costs.
- Expects 2014 capex of $3B, including $870M for logistics investments, most of which are expected to be eligible for drop-down into Valero Energy Partners (NYSE:VLP) in the future.
Wed, Jul. 30, 7:52 AM
Tue, Jul. 29, 11:42 AM
Mon, Jul. 28, 12:40 PM
- Refiner stocks are dropping, in line with the margin squeeze that could result from the drop in crude oil prices, Barron's Dimitra DeFotis writes.
- Rising violence in Libya continues to affect energy assets, but attempts for peace between Israel and the Palestinians over the weekend may be taking some of the risk out of energy markets; Brent prices are down nearly 1% to $107.76/bbl, narrowing the spread with West Texas crude, off 0.3% to $101.74.
- ALJ -3.3%, TSO -1.6%, WNR -0.9%, HFC -0.8%, VLO -0.6%, PSX -0.4%, MPC -0.2%.
Tue, Jul. 15, 11:33 AM
- Valero Energy (VLO -0.2%) climbs off sharp early losses after reporting Q2 guidance below Wall Street consensus.
- Wells Fargo analysts expect Q2 throughput volumes will be generally as expected, while capture rates will fall short of prior expectations likely due to weaker crack spreads; it lowers its Q2 and FY 2014 EPS estimates to a respective $1.18 and $5.87 from $1.31 and $6.00.
- Raymond James analysts continue to “tread lightly” with the refiners, skeptical that WTI-Brent spreads can reach heights needed to drive EPS expectations higher for 2015 and beyond.
- Other refiners are mostly higher after early losses: TSO +0.7%, HFC +0.3%, MPC +0.7%, PSX +0.4%, ALJ -0.5%, WNR +0.4%, CVI +0.8%.
Mon, Jul. 14, 5:22 PM
- Valero Energy (NYSE:VLO) -2.2% AH after saying it expects to report below consensus Q2 EPS from continuing operations of $1.10-$1.25; analysts had forecast a consensus $1.37.
- VLO sees refining operating income higher Y/Y due to higher throughput volumes as well as wider discounts on sour crude oil and certain types of North American light crude oil, offseting weaker Y/Y gasoline and distillate margins in most regions.
- VLO also expects to report a $0.12/share loss from discontinued operations, related primarily to a non-cash charge associated with recognizing an asset retirement obligation for the Aruba refinery.
Fri, Jul. 11, 3:18 PM
- Citigroup analyst Faisal Khan says he is moving toward a more bullish view of the U.S. refining sector after a bout of selling amid low expectations.
- Khan points to continued growth in U.S. and Canadian oil production, "sticky" oil prices due to Middle East volatility, U.S. oil price differentials that are "somewhat contained" at $5-$10/bbl, and headway on refining closures in the Atlantic basin that is only a matter of time.
- As a result, the Citi team upgrades Marathon Petroleum (MPC +2.2%) to Buy from Neutral, as well as HollyFrontier (HFC +2%) to Neutral from Sell on valuation, but downgrades Alon USA Partners (ALDW -0.8%) to Neutral on the belief that Midland-Cushing differentials have peaked.
- Valero Energy (VLO +1.7%) and Western Refining (WNR +2%) remain the firm's favorites - VLO because it sees “crude-on-crude competition on the U.S. Gulf Coast resulting in greater feedstock discounts at Valero’s high conversion refineries," and WNR for its restructuring potential.
Wed, Jul. 9, 6:54 PM
- Shares of refiners such as Phillips 66 (PSX), Holly Frontier (HFC), Valero Energy (VLO) and Alon USA Energy (ALJ) have suffered since the U.S. government decided to allow the export of some ultra-light crude oil, and Barclays believes upcoming earnings reports aren't likely to help much.
- U.S. refiners have fared better than international peers but still have been hit by the narrowing in most of the key North American crude differentials, although refiners exposed to the Cushing-Midland differential are affected less than most, the firm says.
- As a result, Barclays slashes its current-year earnings forecast for most of the refiners; ALJ's FY 2014 EPS estimate is cut to $0.35 from $1.25 to reflect the company’s lower Q2 throughput guidance at its Big Spring refinery (39M bbl/day vs. 46M bbl/day prior).
- The firm cuts EPS at HFC to $3.00 from $4.35, PSX to $6.20 from $7.95, and VLO to $6.25 from $8.35; only Tesoro (TSO) emerges unscathed, with its estimate left at $5.00.
Mon, Jun. 30, 10:47 AM
- Last week's surprise move by the U.S. government to allow the export of condensate products hit the refining sector hard, but the analyst team at Cowen remains bullish on top refiners, believing actual crude exports are highly unlikely and there is no change to the spirit of the law.
- Cowen remains bullish for the longer term and sees potential for a meaningful feedstock advantage for U.S. refiners emerging later this year, with U.S. crude production inflecting at 9M bbl/day and Gulf Coast imports baselining at 2.8M-3M bbl/day.
- Cowen's five favorite refiners are MPC, PBF, TSO, VLO, WNR; the condensate export issue took a toll on the stocks, and investors can buy some of them as much as 15% cheaper than two weeks ago.
Fri, Jun. 27, 4:53 PM
- All U.S. crude oil that is processed by a distillation tower - not just condensate - is exempt from the crude export ban, potentially widening the amount of petroleum U.S. producers can send to markets abroad, Reuters reports, citing U.S. government and industry sources.
- By focusing on how the oil is treated rather than what it is, this week's ruling allowing two companies that produce condensate to export the oil if it is processed by a distillation tower appears to open an option for companies that produce traditional crude to get around the export ban by lightly boiling their own oil, the report says.
- The new interpretation of the ruling will add to the speculation over how much of the U.S. shale oil boom might reach overseas markets.
- ETFs: USO, OIL, XLE, UCO, ERX, VDE, OIH, SCO, ERY, DIG, BNO, DTO, DBO, DUG, IYE, CRUD, USL, PXJ, FENY, UWTI, DWTI, DNO, RYE, SZO, FXN, OLO, DDG, OLEM.
- Domestic oil stocks: OAS, NOG, KOG, CLR, WLL, EOX, SM, SFY, PVA, GST, SN, CRK, BBG.
- Global majors: XOM, CVX, BP, RDS.A, RDS.B.
- Refiners: VLO, HFC, MPC, TSO, WNR, ALJ, PSX, PBF, DK, NTI, ALDW, CVI.
Fri, Jun. 27, 3:59 PM
- Refiners are lower again today after a slight bounce yesterday, as investors resume wariness over the U.S. government's move to allow exports of ultra-light crude oil.
- But Credit Suisse analysts say there’s more to the drop in refiners: U.S. refining is still linked to the world, there is overcapacity in global refining and the risk premium in the oil price is rising, and this week the market was reminded that the lightest barrels (condensate) in U.S. production can be exported (via distillation towers) at relatively low cost, creating more runway for black oil.
- The firm downgrades Holly Frontier (HFC -2.5%), and says Tesoro (TSO -0.7%) needs to beat convincingly in 2Q earnings... to drive further relative upside”; however, Marathon Petroleum (MPC -1.7%) "is becoming significantly more interesting after underperforming,” while it sees most potential in niche refiners such as Delek US (DK -3.4%) and Western Refining (WNR -0.9%).
- Also: VLO -1.1%, ALJ -2.5%, PSX -0.7%, PBF -3.5%, CVI +0.4%, CLMT +1.5%.
Thu, Jun. 26, 3:33 PM
- Most refiners recover part of yesterday's big drop, which some say was an overreaction to the U.S. government move to allow two oil companies to export ultra-light crude oil for the first time: TSO +2.8%, VLO +2%, PSX +1%, CVI +0.7%, CLMT +0.7%, WNR +0.6%, MPC +0.2%, ALJ -1%, PBF -0.6%, HFC -0.3%.
- The death of U.S. refiners is "greatly exaggerated," Cowen analysts say: "The spirit of the law - that hydrocarbon liquids produced in the U.S. must be processed in the U.S. - remains in place, and permits for condensate exports do not constitute precedent for crude oil... We continue to see potential for a meaningful feedstock advantage for U.S. refiners emerging later in 2014."
- Ned Davis Research, however, thinks the news is "potentially game changing for refiners," since it signals a change in the government’s position on oil exports more broadly and noting that it is the export ban, plus inadequate pipeline infrastructure, that has fed recent refiner outperformance.
Wed, Jun. 25, 7:17 PM
- The decision to allow two Texas companies to export condensates looks like a win for Eagle Ford Shale crude producers at the expense of refiners and companies planning to build processing plants along the Gulf coast.
- Today's selloff in refiners reflected concern that the groups will lose some of their competitive edge if condensate exports become common: Valero Energy (NYSE:VLO), the largest U.S. refiner, dropped 8.3%, PBF tumbled 10.7%, PSX fell 4.2%, and HFC slid 6.7%.
- Oppenheimer notes that PXD, DVN, MRO, COP and MUR produce the most Eagle Ford condensate, and could benefit if U.S. condensate prices close some of the gap with European prices; EOG, the largest Eagle Ford producer, produces little condensate and likely benefits little from the lifting of the condensate ban.
- Investor reaction toward Gulf Coast gathering and processing MLPs such as EPD, MMP, KMP and NGLS was more muted, since plans to build splitters in Texas may be undermined by even modest rule changes in the crude export ban that allow Eagle Ford producers to sell condensate after running it from the wellhead to their own nearby - and much cheaper - distillation towers.
VLO vs. ETF Alternatives
Valero Energy Corp is a refining and marketing company. It produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products as well as a slate of premium products.
Other News & PR