Why Valero Energy Is a Stock Worth Remembering

NEW YORK (TheStreet) -- Changing market conditions that could affect profitability have made many investors wary of refining stocks. This is particularly true for Valero Energy (VLO) , the biggest independent player in the industry.

The narrowing spread between the price of Brent and West Texas Intermediary crude has also helped push Valero shares down, by 5.9% in the last two months.

Is it worth your investment if you have a long-term view? According to some analysts including Morgan Stanley, it is.

Bill Day, Valero's vice president for communications, said in an email to TheStreet the company will take advantage of an uptake in exports of condensates, an ultra-light crude oil, and is also well positioned to capitalize on the growing exports of other kinds of refined crude oils from the U.S.

Refinery stocks have had a hard time but some analysts, such as Citi, have been encouraged by their recent recovery.

At around $54, Valero Energy's shares have risen by 6% for the year to date, compared with the almost 8% gain for the S&P 500 for the same period. The company's shares are priced 9.5 times its earnings for the last 12 months. On the other hand, peers Marathon Petroleum (MPC) , HollyFrontier Corp (HFC) , Phillips 66 (PSX) , Tesoro Corp (TSO) , Western Refining (WNR) and CVR Energy (CVI) are all trading at more than 14.6 times their trailing 12-month earnings.

Valero is also one of the leading producers of ethanol, a renewable fuel. The company boasts of 16 refineries, representing a massive throughput capacity of 2.9 million barrels per day, and 10 ethanol plants that can produce up to 85,000 barrels of biofuel per day. The company gets more than 80% of its operating income from refining while the rest comes from the ethanol segment.

Earlier this year, the U.S. Commerce Department allowed Pioneer Natural Resources (PXD) and Enterprise Product Partners (EPD) to begin exporting condensates. The ruling could pave the way for lifting the 40-year old crude export ban. An increase in exports could narrow the gap between the price of American WTI and European Brent crudes, eliminating the price advantage which American refiners have enjoyed for several years.

That said, it is worth mentioning that exports of unrefined crude oil are still banned. While the government is now reportedly putting additional requests for condensate exports on hold, Day, the Valero vice president, said the increase in condensate exports "should benefit Valero."

This is because condensate is an uneconomic feedstock for Valero. Therefore, the removal of this light material from the petroleum feedstock heading towards refineries can have a positive impact on the company's margins.

Meanwhile, the export of refined crude from the U.S. has been increasing since the beginning of 2013, touching the 15-year-high mark in April. This growth has been lead by the Gulf Coast region from where exports have nearly quadrupled in the first quarter of 2014 to 134,000 barrels per day as compared to the peak level of 34,000 barrels per day in 2013.

This trend will likely continue in the future due to the increasing oil production from the U.S. as well as the construction of new pipelines that will supply oil to Gulf Coast refineries. Moreover, Bill Day has predicted that the demand for petroleum and petroleum products will increase on the back of economic growth, "particularly in export markets."

An uptake in exports from the Gulf Coast will fuel Valero's growth in the coming years, thanks to its exposure to this oil exporting region. Valero has seven refineries with throughput capacity of 1.6 million barrels per day, or more than 55% of the company's total capacity, at the Gulf Coast.

An uptake in volumes at the Gulf Coast can also give a boost to Valero's profitability. This is because historically, the company has generated higher throughput margins from the Gulf Coast than most of the other regions. In the last quarter, Valero's throughput margins at the Gulf Coast came in at $10.03 per barrel, increasing by 23.55% from a year earlier, better than the company's total throughput margin from all regions of $9.84 per barrel.

Meanwhile, Valero's five-year old ethanol segment, which has posted 295% year-over-year increase in operating profits in the first six months of this year, might continue to grow at a robust pace. The company is now gearing up to restart a massive 110-million gallons a year ethanol plant, which it acquired five months ago, in the current quarter. The facility is the biggest non-producing corn-powered ethanol plant of the country.

TheStreet Ratings team rates VALERO ENERGY CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate VALERO ENERGY CORP (VLO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and attractive valuation levels. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • VLO's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 2.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 45.23% and other important driving factors, this stock has surged by 43.65% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, VLO should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • VALERO ENERGY CORP has improved earnings per share by 45.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, VALERO ENERGY CORP increased its bottom line by earning $4.97 versus $3.75 in the prior year. This year, the market expects an improvement in earnings ($5.30 versus $4.97).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 26.2% when compared to the same quarter one year prior, rising from $466.00 million to $588.00 million.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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