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Valero Raises Dividend, Gives Q4 Update

Zacks Equity Research

The board of directors of Valero Energy Corporation (VLO) recently announced an 11.1% increase in its quarterly dividend, from 22.5 cents to 25 cents per common share. This translates into an annual dividend of $1.00 per share for 2014, up from 90 cents per share for 2013. The annual dividend yield is now 1.8%. The first increased quarterly dividend will be paid on Mar 12, 2014 to shareholders of record as of Feb 12.

Separately, Valero announced that it expects to report net income in the range of $2.20 to $2.40 per share for the fourth quarter of 2013. The company is slated to release its fourth quarterly numbers on Jan 29.

Earlier, Valero spun off 80% stake from its retail arm – CST Brands Inc. (CST) – through a tax-advantaged distribution to shareholders, to unlock value on May 1, 2013. The spin-off of the company's retail arm generated an immediate net cash benefit of $500 million, after shelling out $220 million in taxes. The remaining 20% was divested by the company on Nov 14, 2013. We feel the move would help the company to concentrate on its industry-specific strategies.

Consequently, the fourth quarter results include a nontaxable gain of $325 million, or 60 cents per share, related to the disposition of Valero’s retained interest in CST Brands.  Excluding this item, Valero’s fourth quarter net income is expected in the range of $1.60 to $1.80 per share.

Valero’s refining segment operating income is expected to be nearly as high as the fourth quarter of 2012, primarily attributable to higher throughput volumes and slightly wider discounts for sour crude oil. In addition, Valero’s ethanol segment operating income is expected to be significantly higher year over year in the fourth quarter due mainly to higher gross margins and production volumes.

Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.0 million barrels per day in its 16 refineries throughout the U.S., Canada and the Caribbean. More importantly, Valero is best positioned to profit from increased refining margins mainly on account of its strategic refinery structure that enables it to use cheaper oil for over one-half of its needs.

Further, in Dec 2013, the company came out with an initial public offering for its logistics master limited partnership (MLP) – Valero Energy Partners LP (VLP). The MLP will not only enable Valero to monetize its existing infrastructure, but would also offer a favorable financing option for future logistics projects.

Valero remains optimistic on the ongoing economic growth projects. These are expected to drive earnings in the future. The company also replaced all imported light sweet crude oil used at its Gulf Coast and Memphis, Tennessee refineries with cheaper North American crude oil recently.

However, Valero’s earnings decreased 70% in the third quarter of 2013 from the prior-year quarter. Lower refining throughput margins in each of the company’s regions and higher refining operating expenses can be blamed for this disappointment. Refiners in the U.S. generally face uncertainty regarding future regulations pertaining to greenhouse gas emissions and the potential for higher requirement of biofuels.

Valero currently carries a short-term Zacks Rank #2 (Buy). Among its peers, a better-ranked stock is Clayton Williams Energy, Inc. (CWEI), with a Zacks Rank #1 (Strong Buy).

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