We maintain our Neutral recommendation on Valero Energy
Corporation ( VLO ) - the largest independent refiner and
marketer of petroleum products in the U.S.
The company's diversified refinery base, better-than-expected
second quarter results as well as its string of growth projects are
somewhat tempered by the risks that include government regulations,
fluctuations in refining capacity utilization and weather
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. It remains 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 posted impressive second quarter results mainly buoyed by
higher throughput margins in the U.S. Mid-Continent, U.S. West
Coast and North Atlantic. Further, the addition of the Pembroke and
Meraux refineries increased the refinery throughput volume by
342,000 barrels per day.
San Antonio, Texas-based refiner has stepped up its investment
level to reap the benefits from the current high trend of oil price
and timid gas price environment. It increased its 2012 capex budget
to $3.6 billion from the prior expectation of $3.5 billion.
Most of the projects are expected to get completed by year-end and
will likely drive a significant improvement in earnings in 2013.
Major capital investment, particularly the hydrocracker units at
Port Arthur and St. Charles this year, should be a key driver for
future growth, beginning in 2013. These projects position Valero to
increase diesel production and diversify its market exposure.
However, it plans to reduce the capex budget to a band of
$2.0-$2.5 billion for the next year after major project completions
this year. The close of the ongoing projects would mark the end of
a series of major expansion programs and will likely increase free
cash flow. The incremental cash flow will provide the company with
additional financial flexibility and increase shareholder
In this regard, it is worth mentioning that Valero announced its
plan to separate its retail arm from the company, likely through a
tax-advantaged distribution to shareholders to unlock value. It
remains hopeful that the move would help it to concentrate on its
industry-specific strategies. Again, the company raised its
quarterly dividend to 17.5 cents per share from 15 cents a share,
reflecting an increase of 17%. These actions clearly reveal
Valero's focus on increasing long-term shareholder value.
However, being the largest independent refiner in the country,
Valero remains particularly susceptible to the ongoing unfavorable
macro backdrop. For example, in Europe, Valero remains exposed to
the difficult economic environment and deceleration of the capacity
rationalization process. Additionally, risks like natural
disasters, unplanned plant disruptions and alterations in
environmental regulations also remain our concerns.
Hence, considering the pros and cons, we see the Valero stock
performing in line with its peers like Sunoco Inc
). The stock retains a Zacks #2 Rank (short-term Buy rating).
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