Valero Braces For Potential Venezuela Sanctions Hit

| About: Valero Energy (VLO)

Summary

Valero Energy Corporation is overexposed to the turbulent country of Venezuela's oil sector.

If the ruling Socialist Party goes ahead with controversial political reforms at the end of the month, the United States may target the country's oil sector.

Valero would likely be hit hard by the implementation of sanctions and would need to move quickly to soften the blow.

Valero Energy Corporation (VLO) is heavily exposed to the Venezuelan oil trade and, as a result, could be disproportionately affected by possible American sanctions on Venezuela. Valero shareholders should carefully monitor the political developments in Venezuela during the next few weeks. If American sanctions are levied on the Venezuelan oil sector, Valero could rapidly become an unattractive investment.

The Situation in Venezuela

Venezuela is on the verge of becoming a failed state. The country, which has long been plagued by shortages of basic goods and skyrocketing inflation, is now being roiled by violent street protests. The Socialist government, which has ruled the country for over a decade, is on the verge of instituting controversial political reforms intended to cement its grip on power.

Source: Commentary Magazine

The proposed reforms have drawn the attention of President Trump who has vowed to impose a "strong and swift economic" response if the reforms go ahead. While the sanctions could target individual members of the Socialist regime, it is also possible that the U.S. could ban oil imports from Venezuela. Although it is unclear what the sanctions will look like, the Trump Administration has made it clear that "all options are on the table".

Valero's Exposure To Venezuela's Oil Sector

Valero's exposure to Venezuela's oil sector stems from the company's major imports of Venezuelan oil to its refineries in the U.S. Although these imports have slowed down in the last year, they are still significant for the company and Valero remains one of the largest importers of Venezuelan oil in America.

Source: Bloomberg

The Impact of Sanctions on Valero

If the U.S places broad sanctions on Venezuela which restrict the importation of any oil from Venezuela, Valero will have two basic options:

  1. Attempt to access oil supplies from other regions of the world.
  2. Reduce the production of gas and diesel until the sanctions are lifted and full production can begin.

Neither of these options would be palatable for the company. Both would likely result in an increase in costs and/or a decrease in revenue. This could negatively impact the company's share price in the short and medium term.

Counterargument

It is, of course, possible that American sanctions on the Venezuelan oil sector could fail to materialize. The Venezuelan government could decide to abandon the controversial reforms. Alternatively, the Trump Administration could decide to impose lighter sanctions on Venezuela which target other sectors of the economy.

What Shareholders Should Watch For

Valero shareholders should pay close attention in the coming weeks to several factors:

  • Political developments in Venezuela;
  • Rhetoric from the Trump Administration in relation to Venezuelan sanctions;
  • Communication from Valero to its shareholders about company efforts to diversify sources of oil imports.

Conclusion

The Trump Administration has taken aim at Venezuela. If the U.S targets Venezuela's oil sector, Valero may be caught in the crossfire. Valero shareholders should vigilantly monitor developments in the coming weeks. If sanctions on Venezuela's oil sector materialize and Valero fails to adapt to this situation, the company could rapidly become an unattractive investment.

Disclosure: I/we 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.

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