Valero Energy Corporation VLO has surged 27.9% quarter to date and is likely to see earnings growth of 12.4% over the next five years compared with the industry’s 10.9%.
Factors in Favor
The company, carrying a Zacks Rank #3 (Hold), is a leading refiner in the United States with operating interests in 15 petroleum refineries. Importantly, the company estimates the daily combined throughput capacity of the refineries at 3.2 million barrels. Notably, the company’s refineries, with a solid track record of refining activities, are located across the United States, Canada and the United Kingdom.
Notably, the International Maritime Organisation (IMO) has set a rule to slash the sulphur content in marine fuel to 0.5% from 3.5%. The target has been to lower sulphur emissions drastically since January 2020, thus raising demand for distillate fuels. The refining player is well-poised to benefit from the new development.
Owing to its solid refining operations, the company has mostly been paying higher dividend yield than the composite stocks belonging to the industry over the past five years.
The company’s short-term business outlook seems bleak since the coronavirus pandemic has dented global energy demand. With strict social-distancing measures in place, people are working mostly from home and avoiding airline travel. Thus, demand for gasoline and jet fuel has fallen considerably, hurting the company’s business. With the possibility of significant reduction in cashflow, the company is unlikely to raise dividends in the near term.
Investors should also know that at the end of the first quarter, the company had cash and cash equivalents of $1.5 billion, reflecting a decline from the fourth-quarter 2019 level of $2.6 billion. Moreover, total debt increased to $11.5 billion, depicting a rise from $9.7 billion in fourth-quarter 2019. Notably, the company’s declining times interest earned ratio has raised questions on the refiner’s ability to pay off a portion of its long-term debt load of $10.6 billion, which is due for repayment after 12 months.
Stocks to Consider
A few better-ranked players in the energy sector are Murphy USA Inc MUSA, QEP Resources, Inc. QEP and CNX Resources Corporation CNX. All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Murphy USA is likely to see earnings growth of 7% in the next five years.
QEP Resources has witnessed upward earnings estimate revisions for 2020 in the past 30 days.
CNX Resources has witnessed upward estimate revisions for 2020 bottom line in the past 60 days.
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Valero Energy Corporation (VLO) : Free Stock Analysis Report
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