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Valero A Good Pick Right Now If You Like Falling Knives

Mar. 02, 2020 1:23 PM ETValero Energy Corporation (VLO)19 Comments
Mare Evidence Lab profile picture
Mare Evidence Lab


  • The coronavirus news is picking up in more geographies as incubation periods for the infected elapse, taking a massive toll on the stock market.
  • Valero has been hit hard as demand for oil is forecast to fall, but some mitigating factors should be considered.
  • Considering buybacks that the company might be conducting at these levels and the future dividend burden it reduces, return prospects are looking quite attractive.

The impact of the coronavirus is clear to anyone who is invested in the equity markets. Major indexes are falling as industrial and consumer activity is perceived to be coming to a standstill across geographies, where reporting is catching up to the virus' spread. Lack of demand for travel and freight means that there will be substantial demand destruction of oil, with forecast declines as high as 20%. As such, companies like Valero Energy Corporation (VLO), which rely on oil throughput, are likely to see lower utilisation rates and lower profits in a period where a recovery in profits was expected from high-sulfur crude discounts. Many might be considering selling at these levels, uncomfortable with the paper losses, but we want to present some points that may provoke reconsideration. We think that these levels actually present some upside and might be interesting to anyone who likes trying to catch falling knives.

Coronavirus Mitigants

First of all, demand destruction will at least mean that crude oil prices fall too, sustaining the crack spread. Even if throughput falls, this is a margin mitigant that we see in action both now (see chart) and have seen historically based on the correlation between refinery stock prices and the WTI or Brent, which over the last 10 years is seen to be linked by a beta of only 0.2 (according to Tiingo).

(Source: TradingView)

With regards to throughput, there are some mitigants there too. China is massive when it comes to its refinery capacity, globally contributing about 15%. It is a substantial contributor and its throughput could be down more than 50% since the Chinese new year. Teapot refineries in China are in really dire straits given their substantial indebtedness, not able to keep up throughput due to their lack of complexity and optionality. Although not a

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Mare Evidence Lab profile picture
Buy-side hedge professionals conducting fundamental, income oriented, long term analysis across sectors globally in developed markets. Please shoot us a message or leave a comment to discuss ideas.DISCLOSURE: All of our articles are a matter of opinion, informed as they might be, and must be treated as such. We take no responsibility for your investments but wish you best of luck.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VLO over 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (19)

The Dow is up another 1200 points and VLO loses money? Stick a fork in it-----it's done.
Herd mentality (groupthink) is focused on overvalued tech stocks as in 1999, but change in sentiment is coming.
Bought a little more. Feels the pain
Mare Evidence Lab profile picture
It's a difficult time for companies like Valero. But we think that there mispricings in companies that have had revenue hits but have a sufficiently robust credit profile. Valero should be fine in this regard.
Frankj78 profile picture
Dumb headline for the article.
It's actually pretty funny that this was supposed to be VLO's big year with the marine diesel sales ramping up. Well, with this stock, things rarely work out as forecasted. Perhaps it may recover in five years, or so. In the meantime, the company can continue to buy its stock back cheaply for the next several years, assuming it can make enough money to finance the buybacks. Hopefully, though, they will at least make enough to pay the dividends. A dividend cut would not be good on top of falling earnings. Over time, though, things may look better unless there is a full blown recession. With VLO, don't ever count out the bad things that could happen.
frankyv profile picture
They should borrow billions to buy back stock, everybody needs refined oil. The cost of borrowing would be compensated by the lower dividends paid out and the low cost of interest to the banks CV will disappear, everybody drives, flies, boats as it never happened.
The Private Island Saver profile picture
Bought a position today for the loooong-term :)
Zucks profile picture
I purchased VLO and a couple more energy stocks in 2016 when I saw the demand statistics for the future for fossil fuel stuff. If I listened to all of these doomsday articles in SA I would have sold everything. I will sell, sometime within the next 5 years or so depending on advances in sustainable trends. Until then, I am forced to collect the dividends. As always, no guarantees.
Nice article here Mare Holding, just don’t see much more of a drop and I do feel this one is worthy of grabbing the knife.
farmed out profile picture
If Sanders wins big on Super Tuesday, I would look for more downside for VLO. If Biden wins, then I think we may have a bottom for VLO, assuming the coronavirus doesn't get way out of hand.

But its your money and your hands, if you want to "catch the falling knife."
dunnhaupt profile picture
The Dems must turn a few red states blue if they want to win in November. Biden might actually do that, but Sanders NEVER.
farmed out profile picture
I think that's probably right, but Sanders being the Democratic nominee makes the markets nervous, because you never know for absolute certainty what the American voters will do.
frankyv profile picture
Neither has a chance!
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