We are maintaining our Neutral recommendation on Texas-based
Valero Energy Corporation
), the largest independent refiner and marketer of petroleum
products in the U.S.
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VALERO ENERGY (VLO): Free Stock Analysis Report
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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 located throughout the U.S., Canada
and the Caribbean.
Valero has sped up its investment level to reap benefits from the
current high trend of oil price and tepid gas price environment.
Major capital investments, primarily hydrocracker units at Port
Arthur and St. Charles scheduled for completion by the end of 2012,
could be key drivers for future growth and are expected to drive a
significant improvement in 2013 earnings. These projects position
Valero to increase its diesel production and diversify its market
Valero's new hydrogen plants at the Memphis and McKee refineries
were commissioned early in 2012. Major plant turnarounds also
occurred at Wilmington. The completion of other significant
projects like the Montreal products pipeline and the Diamond Green
Diesel joint venture, are expected to improve free cash flow in
2013 and in turn fund share buyback.
The completion of the ongoing projects would mark the end of a
series of major expansion programs. This is likely to result in a
drop in capital expenditure by around 35% in 2013 and generate free
cash flow of $1.9 billion. The incremental cash flow will provide
the company with additional financial flexibility and increased
Major growth drivers for the balance of 2012 are expected from
reinvestments in existing plants, improved demand, acquisitions,
higher sour crude oil discounts, ongoing cost-cutting efforts, and
continued expansion of its retail and ethanol operations. Valero's
ability to process cheaper sour and heavy oil gives it an
additional competitive advantage.
However, being the largest independent refiner in the country,
Valero remains particularly exposed to the ongoing unfavorable
macro backdrop. Particularly, in Europe, Valero remains exposed to
the difficult economic environment and deceleration of the capacity
Further, 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
Valero, which faces competition from
Marathon Petroleum Corporation
), holds a Zacks #3 Rank (short-term Hold rating).