Inside Wall Street: An energy bargain

The depressed shares of Valero, North America's largest refinery, don't reflect its positive earnings and solid balance sheet.

By Gene Marcial Jul 16, 2012 2:49PM
Image: Oil refinery (© Kevin Burke/Corbis)Nothing too exciting is going on in the oil patch to stir up investors' enthusiasm these days. But a company that deserves attention is Valero Energy (VLO), one of the world's largest independent oil refiners. Its stock has been sluggish, if not depressed, along with other oil and gas stocks.


Valero is probably one of the few companies in the energy sector that has a positive catalyst that could drive up its stock, now trading at $25 a share, down from a $31 a year ago. The stock traded as high as $71 in 2008. Some industry watchers believe the stock is destined to hit $31 within a year.


"Valero is poised to benefit from the unprecedented secular changes occurring in the North American refining space, driven by increasing crude oil production from U.S. shale plays and the Canadian oil sands," says Tanjila Shafi, analyst at S&P Capital IQ, who rates the stock a "strong buy," with a 12-month price target of $31 a share. Most of this oil is headed toward the Gulf Coast, she notes, giving a competitive edge over its peers. Valero is the largest refiner in the Gulf, with almost 60% of its operating capacity located in that area.


Valero, based in Texas, owns and operates 16 refineries in the U.S., Canada, the United Kingdom, and Aruba. It produces gasoline, jet fuel, asphalt, petrochemicals, lubricants and other oil-refined products, which it markets though its 6,800 retail and wholesale stores. Valero also owns 10 ethanol plants with a total output of 1.1 billion gallons a year.


Valero's big presence in the Gulf enables it to transport refined products globally, and to obtain cheaper feedstock, giving it a cost advantage against its competitors, says Shafi. The company's first-quarter refinery througput volume averaged 2.5 million barrels a day, up 21% from 2011's first quarter. Shafi estimates second-quarter volume at 2.59 million barrels.


The analyst expects earnings to continue improving through 2013 on a better economic outlook and Valero's strategic initiatives. Shafi forecasts earnings to jump to $5.04 a share in 2013, up from 2012's estimated $3.98 and 2011's $3.69. Adding to the stock's allure is its dividend yield of 2.52%, one of the highest dividend yields among its peers. On May 3, 2012, Valero boosted its quarterly dividend to 15% a share, up from 5 cents a year ago.


Paul Y. Cheng, analyst at Barclays Capital, rates Valero as "overweight," with a price target of $31 a share.  Valero stock's current price "offers a compelling entry point, with limited downside risk," says the analyst, after its underperformance relative to its peers and "inexpensive valuation." Cheng notes that the global refining market outlook continues to improve, versus last year's, partly due to the "waves of refinery shut-down announcements, as well as slightly better economic environment, particularly in the U.S."


In sum, "we believe the medium-term outlook for global and U.S. refining markets has brightened compared to six months ago," says Cheng.


Fadel Gheit, senior oil industry analyst at Oppenheimer who rates Valero as outperform, says the leading refiner's financial results for 2012 will benefit from contributions of two new refinery projects that are expected to come on line in the next few months. Valero, he notes, "continues to benefit from wide crude differentials, lower operating costs and strong gasoline demand and diesel export sales -- which more than offset the impact from weak domestic demand."


For Valero, the major potential catalysts for growth, analysts note, include the strong global demand for refined petroleum products, the company's growth projects in development, and a solid balance sheet.  n these times of financial stress in the industry, demand growth and a robust balance sheet are, indeed, a godsend.  

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



Tags: VLO
Jul 17, 2012 7:11AM



It does seem like an opportunity, except the first thing I research is insider buying and selling. And Valaro has many insiders receiving grants but most recently 2 insiders sold stock.


Why would insiders sell if it's such a bargain? I know they need boats, and biigger houses and need to pay support and alimony. BUt what I see is either some really stupid insiders that can't manage thier life & money or insiders jumping off a sinking ship.


Why should I buy Valero when there are plenty of others that pay better dividends and are in better shape and the insiders are buying?


Or I can just keep buying more Gold and if somehow God has cursed the USA and Obama gets re-elected Gold's gonna soar like an Eagle.

Jul 17, 2012 2:57PM
In the words of John McEnroe, "You've got to be kidding me!" This stock has been nothing but a loser for 3 years running. Then you mention the ethanol plants and we all know corn prices are going to go thru the  roof due to the ongoing drought. Seriously, are you being paid by some Velero source? 
Jul 16, 2012 9:51PM

As I understood it - Valero was the conduit for Venezuelan Oil, controlled by cronies of Hugo Chavez. 


Is that not or no longer true?

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