Valero Energy: Cheap Oil Doesn't Stop Refiners

| About: Valero Energy (VLO)
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Valero valuation metrics are all far lower than refining company peers.

Neither oil prices, nor geopolitical issues, justify the extreme disparities.

Valero already has significant competitive advantages relative to peers.

Several positive developments on various growth initiatives from Valero.


This article is split into five main sections: Opinion Context, Valuation Updates, Investment Thesis, Risk Factors and Company Overview. The parts that cover my Valuation Updates and Investment Thesis each have several subsections.

Investors who haven't read any of my articles before might want to notice that I include very many links to additional information. The links range from brief definitions to in-depth reports, since SA readers range from retail investors to investment professionals, and my goal is to balance offering useful information with the nearly impossible task of not alienating either group of investors.

Opinion Context

This article about Valero Energy (NYSE:VLO) is primarily an update for other long-term investors who read one of my prior articles about the company, and who buy upon dips to build positions over time. So, I'll briefly recap my prior calls to help convey to new readers that my current opinions on VLO are from the perspective of a long-term investor who is willing to slightly raise my cost basis to build a position, as long as I believe a stock will continue establishing both higher lows and higher highs. I contend that is the case with VLO while the U.S. and most major economies are still growing (not in recession).

Very different from what the "performance" page on SA lists, it's documented that my first published call on VLO was in October 2013 (at share prices lower than the current 52-week low), not March of 2014 (near the current 52-week high). Here are my conclusions from that October 2013 article:

My opinion is to consider buying VLO in the $34-35 range and I expect it to hit $44 by this time next year (28% return). Add on the 2.5% dividend and, again, you have strong potential for more outsized returns.

source: Yahoo Finance

In an article from the first days of January 2014 (once VLO hit the high-$40s), I updated my price target with the following:

VLO has exceeded my initial $44 price target from October. I considered a $44 target too conservative all along, but I let the negativity circulating about refiners at the time influence me. I still think VLO is "just starting a growth spurt that will last for years," and I'm raising my target to $59.

About six weeks later, in February of 2014 (while VLO dipped back to the high $40s, before its run up to the high $50s), I started a full-thesis article on the company, but didn't get to finish it until late-March. Here are my conclusions:

I'm adding to a position opened in the low $30s, so I'm willing to average up in a $46-48 range. In a less aggressive scenario, I'd hope for a dip to $42-44. I'm retaining my $59 twelve-month price target. My comment that I wouldn't buy VLO at $55 doesn't imply that I think the stock won't go higher. That would be in opposition to everything I said in the article, including my price target. I just don't believe VLO can go up in a straight line, so I only buy dips, not at what could be a short-term top of a run in one week from $48 to $55. Momentum stalled at that time, and the chart looks like a bearish MACD crossover (short-term measure). I'm bullish on VLO overall, but in almost any circumstance, I wouldn't buy above $50.

A few months later in May, VLO hit a $58-59 short-term top, but in October, it dipped back to my ideal $42-44 buy range, then to the low-end of my $46-48 "more aggressive" range about a week ago. So, I'm a little late with this next update, since I only write about each of the dozens of companies I cover a few times a year, but I did reiterate my buy ranges and price target twice in July:

Even though my most recent article about VLO pre-dates the recent news that is causing weakness for all refiners; my VLO thesis, price target and timeline remain unchanged. I am still willing to average up in my $46-48 range and, for now, I'm retaining my $59 twelve-month price target.

There's still no clarity on the oil export ban issue, and my investment thesis is the same, but I'd still like to update my valuations and price target because I believe earnings ultimately drive share prices, rather than short-term issues.

Valuation Updates (Upside Potential & Downside Risk)

My price target is based on a combination of valuation calculations including: trailing and forward Price-To-Earnings ratios [P/E], both in terms of historical ranges of VLO ratios and current multiples in the peer group; Discounted Cash Flow [DCF] to estimate how VLO might fare in various earnings scenarios; and the Price-To-Earnings-Growth [PEG] ratio, which also factors in EPS growth.

P/E Ratio Valuations

Because it provides context for my current valuation, and parts of it still apply today, here are some of my valuation opinions about VLO from March of 2014:

My price target is partially based on VLO trading at one of the lowest P/E multiples in its peer group, combined with the fact that the VLO earnings power is consistently and significantly underestimated. For example, VLO has beaten EPS estimates for all of the last four quarters, often by a wide margin, and often after estimates rose significantly. I believe that VLO deserves, and will get, a P/E multiple that is more in-line with peers.

The last four quarters of EPS for VLO were $1.78, $1.54, $1.22 and $2.00; all four EPS figures exceeded the consensus estimates by a range of 0.80% to as much as 26.60%; and the total trailing-twelve EPS is $6.54. There were some significant non-recurring events in some of those quarters, so it's not currently expected that forward earnings will match that very high trailing-twelve EPS.

source: Yahoo Finance

With the $50.29 current share price, and the $6.54 trailing-twelve EPS, VLO's trailing P/E ratio is 7.69x. With the $5.32 EPS consensus estimate for 2015FY, the forward P/E ratio for VLO is 9.45x. I calculate multiples for myself, since I often find the data on various websites to be way off. However, this time, the data from FinViz matches my calculations either exactly or very closely, so I'll go ahead and refer to that data for my P/E multiple comparisons (not my DCF calculations), so that all data are from one source and comparisons are fair.



P/E Trailing

P/E Forward

PEG Ratio

Divided Yield

Market Cap

Marathon (NYSE:MPC)






Phillips 66 (NYSE:PSX)






Valero Energy






source: FinViz

As you can see, the market currently assigns VLO valuation multiples that are all drastically lower than both of the most comparable peers. For a reference point, the trailing P/E multiples of MPC, PSX and VLO from my article in March were 13.84x, 13.05x and 10.96x, respectively. The forward P/E multiples for MPC, PSX and VLO from my March 2014 article were 8.84x, 9.95x and 9.24x, respectively. So, even though the trailing P/E multiple of all three companies is now much lower, the forward P/E ratios of MPC and PSX are now much higher, yet the forward P/E for VLO is still only higher by an insignificant 0.21.

The forward multiples of these three peers were previously more aligned, and I contend that they should be again. With the $5.32 EPS estimate for 2015FY, if the market granted VLO an 11.15x forward P/E comparable to MPC, the VLO share price becomes $59.32. That's what the share price could reach now, not twelve months from now and, considering VLO was actually granted a slightly higher forward P/E than MPC just nine months ago, it's very reasonable. Even with a 10.48x forward P/E comparable to PSX, the VLO share price is $55.75. Again, that price refers to now, so not only was VLO extremely undervalued in the low-$40s, but it also remains undervalued at $50.29, in my opinion.

Next, I'll offer some scenarios with the $5.84 EPS estimate for 2014FY, since that would become the trailing-twelve EPS once VLO reports 2014FY in about one month. With the 10.96x trailing P/E that the market valued VLO with just nine months ago, the share price would become $64.01. With the 11.10x and 11.32x trailing P/E multiples that the market currently grants to MPC and PSX, respectively, VLO's share price would become $64.82 or $66.11, respectively.

DCF Valuations

I have done numerous DCF calculations to test varying scenarios, but all were constrained by the very conservative parameters I'll first detail. I started with the 2014FY estimate for EPS because it will become the trailing-twelve EPS in about one month when actual EPS is reported (if the estimate is at least met), and my focus is the twelve-month timeline of my price target. It doesn't really matter whether the estimate is at least met, since all DCF calculations are with the 2014FY consensus estimate of $5.84 reduced down to only $5.00, which is unlikely with only one month before VLO reports actual EPS for 2014FY. I did that to help illustrate how difficult it is to justify VLO share prices in the $40s, when valuations are based on earnings, versus oil and gas [O&G] sentiment.

For additional layers of conservatism, I also reduce the typical five-year initial growth period to either four or three years, limit the terminal growth rate to a 4% maximum (a fraction of the current growth-rate projection), and limit the discount rate to a 15% minimum (versus an extremely more forgiving 10%).

As the chart below shows, VLO is expected to grow -8.90% next year, which is already factored into the 18.37% average growth rate projected for the next five years, as well as the various EPS figures mentioned. In ultra-conservative initial calculations, I lowered the 18.37% five-year EPS growth rate to 12% (it was 10.37% in March 2014, when I last wrote about VLO). The outcome is a $61 share price. Next, I raised the five-year growth rate back to 18.37%, but reduced the four-year period previously used for initial growth down to three years (versus the typical five years). The outcome is a $67 VLO share price.

When we consider the conservatism from all of the DCF calculation inputs, VLO should be able to easily meet or exceed the resulting price ranges, if the stock is valued on fundamentals. My valuation focus is the twelve-month timeline of my price target, so the example share prices don't represent fair value for VLO today, and there is never any guarantee that the market will price a particular stock based on actual earnings, versus sentiment about a very broad sector.

Valuation Conclusions

As you can see on the chart below, VLO has outperformed both MPC and PSX significantly and consistently over the entire period of the last five years. Even so, as detailed by the valuation examples, the market is currently valuing VLO drastically cheaper than both MPC and PSX. I believe the disparity will narrow, so I'm raising the twelve-month price target to $63 (from $59). I expect that VLO will reach my price target via a fairly erratic path, so keep in mind that the timeline for any price target is just as important as the price target itself.

My $63 VLO price target is 69% above the $36.50 price of my initial opinion, 40% above the $45 midpoint of my buy ranges, and 25% above the current $50.29 share price. Those percentage estimates for upside potential, as well as those for downside risk in the next section, do not include the additional returns from the 2.19% dividend yield. By the way, VLO raised its dividends twice in 2014, for a total 37.5% increase over the start of 2013. I expect to see more increases, since VLO consistently generates strong free cash flow.

source: company presentation

source: Yahoo Finance

Downside-Risk Estimate

I convey downside-risk estimates via the 200-day Exponential Moving Average [EMA], so that readers have a ballpark idea of my opinion well after an article is posted, but my opinion is actually based on very pessimistic versions of the same valuation methods used to develop my price targets. For example, if the P/E for VLO were to remain in a 7x range or lower throughout the next twelve months, or if VLO misses the EPS estimate for 2014FY by a very wide margin next month, the shares could revisit the low-to-mid $40s. I obviously consider those scenarios unlikely, but a market-wide correction more severe than what we recently experienced could also have a similar temporary effect.

If VLO does dip below the $46-48 "more-aggressive" range, I expect shares to find support at a distance from the 200-EMA similar to where the last sell-off ended, which was about 13% below the 200-EMA. A 13% dip below a $49.29 current 200-EMA would put VLO in my $42-44 "less-aggressive" buy zone.

I round off these figures to emphasize that they're only estimates, and it's not coincidence that my buy ranges are close to my downside-risk opinions, since I'm a long-term investor who only buys on dips. A potential 13% sell-off may sound like a lot, but it's about half of the upside potential between the current share price and my target price, and one third of the upside potential from the $45 midpoint of my buy ranges. It's also worth noting that, after a six-week stint below the 200-EMA (September/October), and another several-week dip below the 200-EMA ending a couple of weeks ago, the 200-EMA for VLO may be deceptively low, which would make the downside levels a little higher than where I've estimated. Again, I don't expect VLO to trade down to these levels.

Personally, I'm now leaning toward my $42-44 less-aggressive buy range to consider adding to my VLO holdings again, but that's only because I added to my position recently (as I commented in an October StockTalk).

Analysts Opinions

Eight research firms now rate VLO as a Buy or Strong Buy (down from eleven during my March article), ten rate it a Hold (up from seven in March), and zero rate it a Sell (the same as in March). The consensus rating is still Buy, and the current consensus price target is $61.33 (it was $53 in March). Over the past few months, five firms have reiterated (or initiated coverage with) Buy ratings and/or raised their price targets, two of those have reduced their price targets, and two firms have downgraded VLO from Buy to Hold. The analysts' calls are mixed, but clearly lean positive, both in terms of the ratings and price targets.

It's worth noting that, at the time I offered my initial $44 price target for VLO, the price targets from all research firms except one were in the $34-42 range. Similarly, at the time I updated my price target to $59, the price targets from most all research firms were in the low-to-mid $40s, and subsequently moved to the high-$60s and mid-$70s right around the time VLO topped in April. In other words, it's not unusual for analysts to be late on VLO, in both directions.

Investment Thesis

In reviewing my previous VLO article, I realized that I went right into company specifics without really discussing why I wanted to invest in refining in the first place. So, I'll first recap the underlying foundation of my thesis: [1] U.S. crude production long-term trends align with refining companies in general.

Since my last article details each factor, and this article was an update (before it morphed into its current state), I'll just touch on new developments related to my view that: [2] VLO has significant competitive advantages from its scale of operations, prime geographic locations, aggressive expansion initiatives and logistics portfolio. All of those factors are ultimately driven by VLO's desire to capitalize on the differentials between cheap North American crude and higher prices for refined products on the international market. In fact, that's why it is important that VLO has roughly 57% of its total refining capacity on the U.S. Gulf Coast, and has more capacity in the Gulf Coast region than competitors.

[1] U.S. crude production long-term trends align with refining companies

I wish I could predict for you whether the U.S. oil export ban will eventually be lifted, or where oil prices will go in the near term, but rather than speculate on the outcomes of geopolitical issues such as those, I'll focus on what we know.

According to various reports from the U.S. Energy Information Administration [EIA], U.S. crude production is at the highest levels in over 25 years, and the U.S. proved reserves are at the highest levels in over 39 years, yet the total U.S. refining capacity has grown at a slower rate over similar time periods. In fact, the number of operable refineries in the U.S. has actually been declining, though that is largely due to increasing efficiencies at existing refineries, such as growing capacity by adding more specialized processing equipment.

Neither a temporary supply/demand imbalance, strong U.S. dollar, nor a crash in the commodity price affects proved reserves, or is likely to cause production to revert to decades-old levels. Clearly, production always fluctuates to adjust for such issues, but U.S. crude production is likely to remain relatively high for the foreseeable future. These high levels of production must be refined, so the overarching trends still favor refiners. In fact, refiners may be among the best O&G industry investments in the current environment, as long as one is not of the mind that petroleum products are a thing of the past, or that a significant economic recession is underway. Refining is still a cyclical industry, after all.

With that foundation noted, VLO is the largest refiner in the U.S., independent or otherwise (see Company Overview). In fact, VLO's share of refined product exported from the U.S. is averaging 20-25% over the last several years. Note that only independent refiners are true investments in refining, since the O&G industry is very broad and integrated O&G companies engage in every aspect, including drilling for oil and natural gas, which is a whole different ballgame.

source: U.S. Energy Information Administration [EIA]

[2] Valero's competitive advantages: scale, locations, logistics and expansion

According to the EIA, Valero increased its refining capacity by 277% between 2000 and 2013 (detailed in Company Overview section), and "the number of refineries and companies both declined over the same period, as concentration of refining capacity among the top five companies increased from 38% in 2000 to 44% in 2013." VLO is by no means finished with growth initiatives though.

For example, VLO is reinvesting in long-term projects to upgrade and expand three of its refineries in Texas by early 2016. The new processing capabilities are intended to save on input costs by replacing some imported foreign crude with cheaper Texas crude, thereby strengthening margins. The multi-faceted projects include building docks at the Corpus Christi refinery. Interestingly, a VLO executive mentioned that, theoretically, the docks could be used for U.S. crude exports. That is not at all the current intent, so I only mention it to help make the point that issues such as a potential lifting of the crude export ban are short-term issues that a well-run company can adjust to and overcome.

In September 2014, VLO started operating the new rail offloading facility at its Port Arthur, Texas refinery, which is the third crude-by-rail expansion that VLO has completed in about a year (along with St. Charles and Quebec City). This facility allows VLO to get cheap Canadian heavy crude to the Port Arthur plant and better meet demand for heavy crudes with less importing from Venezuela and without a pipeline from Canada. The facility also aligns with the plans of railroad operator Kansas City Southern (NYSE:KSU) and oil logistics company Global Partners LP (NYSE:GLP) to build a huge railcar terminal in Port Arthur.

source: company presentation

In August 2014, VLO secured a long-term shipping agreement for, as well as an option to buy a 50% stake in, the Diamond Pipeline of Plains All American LP (NYSE:PAA). The 440-mile pipeline will connect VLO's Memphis refinery to the crude hub in Cushing, Oklahoma, which is home to the largest oil storage facility in the world: The Cushing Tank Farm. The Diamond Pipeline should be completed in 2016, and VLO has until January of 2016 to exercise the option.

In August 2014, Valero Logistics U.K., a wholly-owned subsidiary, announced that it will triple capacity and make all fuel grades available at its fuel terminal in Avonmouth, England. In addition to expanding capacity at the site, VLO will upgrade the ethanol blending system. The work is to begin during this quarter.

Also in August of 2014, VLO commenced production at the latest addition to its ethanol portfolio, which had been idle under the previous ownership. In March of 2014, Valero Renewable Fuels LLC, a wholly-owned subsidiary, acquired the eleventh ethanol plant that VLO now owns. The plant has production capacity of 110 million gallons per year, securing VLO's position as one of the top-five U.S. ethanol producers. Gene Edwards (a top Valero executive until he retired in 2014) had led the company's ethanol plant acquisitions for many years, and mentioned the key "access to markets" factor within his brief comments:

This purchase diversifies the Valero Renewables portfolio of assets and access to markets, and will be positive for Mount Vernon as well.

The Mount Vernon, Indiana plant not only gives VLO close access to feedstock suppliers, but also the additional logistical advantages of strong rail, truck and barge transportation. As the company's first ethanol facility located at a major port on the inland waterway system, the plant is expected to provide VLO with a strategic advantage in ethanol production and distribution. For example, the Mount Vernon Port is right on the Ohio River, which is a major transport route for various commodities, so it has very robust access to intermodal transport.

Circling back to refining for a moment, more growth in the future is also likely there. One reason I include a Company Overview in my articles is because a company's past can offer clues to its future. For example, VLO has historically been a pretty acquisitive company. Venezuela's national oil company recently put some refineries up for sale, but those particular assets seem redundant to VLO, so I only mention it to help make the points that VLO obviously intends to maintain its leadership role, and new opportunities are always available.

Risk Factors

Discussing every potential risk factor that could impact VLO would make this article even more unreadably long, so I recommend reviewing the company's annual report or other filings for explanations of all potential risk factors.

With that said, I've included this section at the request of a reader, primarily to discuss a risk factor that isn't covered as much as oil prices and the export ban: ethanol. Basically, the issue is that the Environmental Protection Agency [EPA] could raise the 10% that is mandated to blend ethanol with gasoline for use in the U.S., which could raise the costs for refining companies to remain in compliance via the Renewable Identification Number [RINs] system. There is also the possibility that the mandate will be lowered or eliminated altogether, but there has been no definitive action thus far. Again, rather than speculate about things that no one can possibly know, I'll focus on what we know.

We know that the U.S. surpassed Brazil in 2005 to become the world's number one producer of ethanol, and that the U.S became a net exporter of ethanol in 2010. Research firm Platts reports that U.S. Census Bureau data shows that, over the first six months of 2014, U.S. ethanol exports increased a staggering 56% year over year from 2013. Similarly, according to the EIA:

The 2014 trend is for the U.S. to remain a strong net exporter of ethanol, with the potential for substantially higher export levels, given the recent abundant corn crop and EPA proposed reduction in domestic RFS targets. While favorable blending economics are likely to drive domestic ethanol demand, the U.S. is likely to remain the world's leading ethanol supplier.

There is huge and growing demand for ethanol from nations that either don't have abundant natural resources, or don't have the extraction and production capabilities, and need ethanol to stretch limited fuel supplies. There are many examples in Europe and the Asia-Pacific region. For example, Platts reported:

… U.S. fuel ethanol exports to the Philippines have surged 53% year on year in the first ten months of 2014," and "fuel ethanol exports to Korea have grown to 97.7 million liters year-to-date [to October], compared to only 5.2 million liters in the same period of 2013.

I'm sure you've already guessed where this is going. As mentioned earlier, we also know that VLO is one of the top-five U.S. ethanol producers. Most ethanol producers in the U.S are landlocked, since the ethanol industry in the U.S. was initially established to serve domestic demand, so operations are intentionally concentrated near corn feedstock supplies far from all coasts. However, as this article touches on in other contexts, and as my last VLO article goes into more detail about, VLO has both a huge presence on the U.S. Gulf Coast (a primary "window to the world" for the nation), and a huge portfolio of logistical assets that is also growing relatively quickly (pipelines, barges, railcars, trucks, etc.).

Of all places, even Brazil is starting to import ethanol from the U.S. More than any other nation, Brazil relies on ethanol for its fuel, since all gasoline there is required to contain at least 25% ethanol (more than double the maximum for the U.S.). In fact, Brazil is considering raising its minimum even more, after it was already raised from 20% to 25% only about a year earlier.

VLO is already a major exporter of refined products into international markets, so my opinion is that any disruptions to the ethanol industry, such as potential changes to blending requirements for U.S. gasoline, will ultimately prove to be a short-term issue for VLO. Clearly, the demand is there and VLO has both the supply and the means to get the supply to the international market, if at some point it becomes less economical to focus on the U.S. In fact, VLO may well be in the best position to weather such issues. There may be adjustment pains in that situation, but other companies without the scale and strategic advantages are likely to be disproportionally affected, which could be opportunity for VLO.

In the short-tem, VLO has already told us to expect both refining margins and ethanol margins to be lower for 2014Q4 compared to 2014Q3. That should not be a surprise, since the "crack spreads", WTI/Brent crude spread, and spread between very low corn prices and ethanol prices, all narrowed considerably in recent months. Considering that both oil prices and corn prices have been at historic lows in recent months, I would be more surprised if VLO did not face some margin pressure. In other words, as implied by high earnings from VLO in some trailing quarters, the company has some tough comparables in future quarters, but I don't invest on a quarter-to-quarter basis. So, I'll be looking at margins in the upcoming earnings report (as always), but I don't expect that margin pressure will indicate any operational deficiency on the part of VLO. In fact, I will most likely consider it a short-term issue that is unlikely to persist.

source: company presentation

Company Overview

Valero Energy is a multi-national petroleum refining and marketing company based in Texas. The Valero name is from Misión San Antonio de Valero, now known as The Alamo. Valero is number ten on the Fortune 500. According to the EIA, Valero is the largest independent refining company in the world, has the largest refining operations in the U.S. (independent or otherwise), and is the top exporter of refined petroleum products in the U.S. Emphasis is on the word "independent," as Valero operations are not larger than all state-owned O&G "companies," or all integrated O&G super majors, throughout the world.

Valero is an international manufacturer and marketer of products including the various transportation fuels (gasoline, diesel, jet fuel, and renewables), as well as very many other petrochemical products (natural gas liquids [NGLs], sulfur, asphalt, propane, naphthenic oils, solvents, aromatics, petroleum coke, etc.).

Valero Energy has two primary reporting segments: Refining and Ethanol.

Valero's primary assets include fifteen refineries in the United States, Canada and the United Kingdom, with combined total capacity of roughly three million barrels per day [bpd]. About 57% of Valero's refining capacity is located in the U.S. Gulf Coast. Valero also owns eleven ethanol plants with a total production capacity of about 1.3 billion gallons per year, which the company markets on a wholesale basis. Valero also has a 50-megawatt per hour wind farm in Sunray, Texas, and also owns significant transportation and logistics assets, mostly in the U.S (pipelines, terminals, tanks, marine docks, railcars and rail facilities).

Valero was formed in 1980 via a spin-off from Coastal States Gas Corporation, which was the largest spin-off in U.S. history, at that time. A year later, Valero bought a refinery in Corpus Christi, Texas and began a huge expansion project to transform it into the state-of-the-art refinery that commenced operations in 1983. That facility is now the Bill Greehey Refinery complex, since it is actually two plants: [1] the original West Plant, which has more than tripled in capacity since online, is one of the most complex refineries in the world, and specializes in environmentally-clean fuels and products; and [2] the East Plant, which was acquired by Valero in 2001, processes heavy, high-sulfur (a.k.a. "sour") crude oil into light products. The Bill Greehey complex is Valero's flagship operations.

Throughout the 1980s and 1990s, Valero continued its transition from natural gas handling to oil refining and marketing, divesting its natural gas business to Pacific Gas & Electric (NYSE:PCG) in 1997. Also in 1997, Valero acquired Basis Petroleum, which added four more refineries in Texas and Louisiana. The Basis deal made Valero the leading U.S. Gulf Coast refining company.

In 2000, Valero purchased from ExxonMobil (NYSE:XOM) its Benicia, California refinery, which is considered one of the most complex U.S. refineries. In 2001, Valero bought Huntway Refining, as well as Ultramar Diamond Shamrock and Shamrock Logistics LP, the latter of which was later spun off as NuStar Energy LP (NYSE:NS). In 2003, Valero acquired its St. Charles Refinery in Louisiana, another of the most complex U.S. refineries, yet still suitable for upgrades that enhance profitability with relatively small Cap-Ex investments. In 2005, Valero acquired Premcor in an $8B deal that added four more refineries and was "one of the largest and most strategic acquisitions in Valero's history." The following year, Valero acquired several more refineries when its former parent company, Coastal Sates, merged with El Paso Corp. Valero entered the ethanol business in 2009 when it bought seven ethanol plants, then added three more in 2010.

Valero entered the Western Europe refining market in 2011 by acquiring from Chevron (NYSE:CVX) the Pembroke refinery, which is one of Western Europe's largest and most complex refineries. That deal also included various pipelines and fuel terminals throughout the United Kingdom and Ireland. Also in 2011, Valero acquired its Meraux, Louisiana refinery from Murphy Oil Corporation.

In 2013, Valero spun off of its retail business as CST Brands (NYSE:CST), but continues supplying fuel to the CST Brands locations through long-term supply agreements. Valero also continues to supply fuel to about 7,300 independently owned wholesale locations carrying the Valero, Diamond Shamrock, Shamrock and Beacon brands in the United States and Caribbean; the Ultramar brand in Canada; and the Texaco brand in the United Kingdom and Ireland.

Valero Energy owns 2% of the general partner interest, 100% of the IDRs and almost 70% of the limited partner interest in the midstream MLP the company took public in 2013: Valero Energy Partners LP (NYSE:VLP). Valero Energy also has ownership stakes in a number of joint ventures [JV] and partnerships that include: 50% stake in a Parkway Pipeline JV with Kinder Morgan (NYSE:KMI); 50% in Diamond Green Diesel JV with Darling International (NYSE:DAR); 50% stake in a PI Dock Facilities JV to operate crude oil docks and related facilities; and, as of 2014, a 50% stake in the Transport Maritime Saint-Laurent JV with Groupe Desgagnés for the ownership and charter of two crude transport ships.

For more details about Valero Energy Corporation, see the corporate website.

Final Thoughts

I believe the recent dip to the middle of my $42-44 buy zone was an excellent chance to add to VLO holdings, and the dip to $46 a couple of weeks ago was also a good second chance. Some might wonder why I didn't write about VLO at those times, but I would say that I actually did one better -- I wrote about the opportunities before they occurred. In other words, it's simply not possible to write dozens of articles in a week, about all of the companies I cover, each time there's a market-wide correction or an opportunity created in some other way. So, I try to offer buy ranges and price targets to give readers time to do further due diligence, and be ready to buy (or not) as the opportunities arise.

With that said, I still believe there's a good bit of upside potential for VLO from current levels, so I'm not arguing that the September/October dip was the last chance to buy ever. Again, my opinions are always most suitable for long-term investors who build positions in stages over time, so my suggestion all along is to buy on an extreme sell-off like the one in October, and add on subsequent dips. I still don't expect VLO to follow a straight-up path to my new $63 price target so, while I'm not sure there will be many more opportunities during the current cycle to buy VLO in the low-$40s, I do think there will be buyable dips.

We'll obviously get a better sense of where VLO is headed over the short-term when the company reports 2014Q4/FY earnings in about a month. When I can make time, I post relatively brief follow-up opinions about things like earnings in the comments section of each of my articles, so those who find the updates helpful have the option of checking the little "Track New Comments" button at the top of that section. Also, if I don't see a need to adjust my price target by mid-2015, I'll at least comment on the company (along with all others I cover) in the mid-year update article that I'm likely to write in July, similar to those I've written in the past, and the new-year update I'll write in early January.

Again, this article is an update and, since my theses always have a long-term focus, my earliest articles about a company tend to include more detail about the thesis and risk factors. So, if VLO interests you, consider also reading my article from March 2014, as much of the information within isn't date sensitive.

As one last thought, investors interested in VLO seem unlikely to be extremely risk-averse types, so I'll mention that other long-term investment options that I consider very undervalued right now in the very broad O&G industry include Halliburton (NYSE:HAL) and Williams (NYSE:WMB). I recently wrote an article about HAL, but I haven't yet written one about WMB, even though I've owned the shares for years and have done very well with them. I plan to write a first article about WMB at some point in the next few months so, for now, I'll just mention that I consider WMB very undervalued in the low-to-mid $40s.

Thanks for reading. I wrote this article 12/22-12/29. Perhaps consider clicking the "Follow" button at the top of this page to see my new articles on your SA home page, since many of them are only free for the first thirty days after the publish date. As always, my opinions are not individual investment advice and every reader is free to dismiss any or all of my opinions. Or, as SA states that idea: "Read. Decide. Invest." Best of luck with the rest of your due diligence.

Disclosure: The author is long VLO, CVX, HAL, WMB.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I’m long VLO, CVX, HAL and WMB; will not buy or sell any shares in the next 48 hours; and do not plan to close any of the positions for at least several more years.