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Valero Stock Analysis

David Park Ryan Ranson. Valero Stock Analysis. Investment Thesis.

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Valero Stock Analysis

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  1. David Park Ryan Ranson Valero Stock Analysis

  2. Investment Thesis “Valero Energy Corporation appears to be an attractive investment opportunity based on its low valuation and its dominant position in the refining and marketing industry. Valero’s size and expertise in refining allow it to have the lowest operating cost per barrel, giving the company a significant advantage over other refiners. The company’s ability to refine cheaper feedstocks also helps to increase refining margins and thus profitability. Although the industry is expected to experience slow growth in the future, Valero’s strong fundamentals will allow it to return capital to investors through dividend growth and stock buybacks. In addition, any reversion to historical relative valuation measures will provide investors with superior capital gains. “

  3. Industry Overview • Drivers of profitability • Refining margins • Per barrel cost reduction • Refining capacities • Porter’s 5 forces • Threat of entry: Low • Power of suppliers: Medium • Power of buyers: Low • Threat of substitutes: Medium-High • Competitive rivalry: Low-Medium

  4. Valero Summary

  5. Valero Summary • What makes Valero different? • Lowest operating expense per barrel

  6. Valero Summary • What makes Valero different? • Capability of refining cheaper feedstocks

  7. Valero Summary • Economic engine • Profit per barrel refined • Value proposition • Refining at a lower cost • Current operating environment • Goodwill writedown in 4th quarter 2008 • Net income adjustment in analysis • Issued debt in 1st quarter 2009 • Reducing capital expenditures for 2009 • Agreement to buy 5 ethanol plants

  8. Key Risks • Volatile refining margins • Addressed in sensitivity analysis • Government/environmental regulations • Supply of crude oil • Refinery interruptions • Integrated oil & gas competitors • Continued economic downturn • Pressure on margins

  9. Relative Valuation

  10. FCFE Valuation

  11. Sensitivity Analysis

  12. Critical Issues • Refining margins • Out of Valero’s control, but helped by sour crude • Operating cost per barrel • Already a leader but current levels are high historically • Utilization rates/capacity • Do not necessarily need to expand but cutting capacity will reduce profitability

  13. Questions?

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