Valero's Refining Base Holds Promise, Price Concerns Remain
On Apr 13, 2016, we issued an updated research report on Valero Energy Corporation VLO, the largest independent refiner and marketer of petroleum products in the U.S.
Valero is one of the leading refiners in the world with a low-cost asset base. It refines cheaper, lower-quality oil and sells some of its yield to profitable international markets. The company has reduced its exposure to the East Coast markets, which are currently unprofitable. Most of the company's assets are concentrated in profitable regions like the Gulf Coast and the Mid-Continent.
The company expects to spend $2.6 billion on capital projects in 2016 of which $1 billion has been allocated to growth investments. The company will now be able to concentrate its capital on strategic growth projects as well as turnarounds. Valero is also poised to witness an improvement in free cash flow, which it will deploy via dividends, share buybacks and through debt reduction planned for 2016, thereby retaining its shareholders' confidence. Notably, the company increased its quarterly dividend three times in 2015.
However, the continued weakness in crude prices is likely to result in higher gasoline demand, especially during the upcoming summer driving season. Growth in refined product sales should support earnings at Valero.
The refining segment, which accounts for the bulk of Valero’s revenues and earnings, is the major growth driver. However, since refiners are buyers of crude, an increase in oil prices can squeeze their profitability.
Moreover, the inherent volatility of the refining business reduces the accuracy and reliability of long-term earnings and revenue estimates. Additionally, results are often adversely impacted by unplanned shutdowns.
Further, Valero expects a fall in throughput volumes in 2016. Also, continued weakness in its ethanol business is likely to negatively impact earnings.
Zacks Rank and Stocks to Consider
Currently, Valero carries a Zacks Rank #4 (Sell). Some better-ranked players from the energy sector are ReneSola Ltd. SOL, FutureFuel Corp. FF and Suncor Energy Inc. SU. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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