Nelson Benson

Stocks to Buy Before the Oil Bubble Bursts

The past is not prologue. Keep in mind that Valero refines 57% heavy crude which it buys at a $20 discount to WTI which means a crack spread that is higher than its competitors. Keep in mind the world is running out of light crude, has plenty of heavy crude (Canada has 85 years worth of reserves as of now) Second, Valero and other refiners are switching to Diesel with the intention of exporting it to Europe. Bottom line, they are running a business, if they cannot sell it in the US at a profit, they will sell it elsewhere. Demand here is going down, elsewhere is going up. Their refinery are very complex and their market capitalization is now less than the company's replacement cost (which would take 10 years to build)

So the foregoing conclusion is that you cannot tell where the stock will go, but have to agree that they have very valuable assets, different from other refiners, and that in the long run, asset prices tend to be reflected in stock prices. Why, because if say Petrobras decided tomorrow it would need to build 4 refineries, it would be cheaper and quicker for them to buy Valero at 30% premium. Therefore, when analysing Valero, you may want to set aside
EPS and look at Tangible assets.