We reaffirmed our Neutral recommendation on the largest North
American independent refiner and marketer of petroleum products
Valero Energy Corporation
), on May 14, 2013. Riding on growth in refining throughput
margins, the company reported robust earnings in the first
quarter. The company currently holds a Zacks Rank #3, which is
equivalent to a short-term Hold rating.
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Texas-based Valero Energy offers the most diversified refinery
base among all the independent refiners, with a capacity of 3
million barrels per day in its 16 refineries located throughout
the U.S., Canada and the Caribbean.
Valero's stable performance in the first quarter can be traced
back to favorable refining margins and lower operating expenses.
With $1.9 billion in cash at the end of the quarter, we think the
company certainly has the financial flexibility to make
aggressive purchases, thereby expanding its refining footprint.
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.
Valero recently spun off 80% stake of its retail arm -
CST Brands Inc.
) - 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. We feel the move would
help the company to concentrate on its industry-specific
strategies. Also, the company plans to sell out the remaining 20%
stake over the next 18 months which will infuse more liquidity in
the books of the company.
However, being the largest independent refiner in the country,
Valero remains exposed to the ongoing tepid macro backdrop.
Refiners in the U.S. generally face uncertainty regarding future
regulations pertaining to greenhouse gas emissions and the
potential for higher requirement of biofuels. Other threats
include government regulations, weather conditions, crude oil and
natural gas prices as well as renewable fuel prices. These can
result in increased costs, reduced growth and fines or other
Other Stocks to Consider
There are other stocks in the sector that however appear more
rewarding. These include
), which are expected to perform impressively over the next few
months and carry a Zacks Rank #1 (Strong Buy).