On March 5, 2014, we issued an updated research report on Valero Energy Corporation (VLO). 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 throughout the U.S., Canada and the Caribbean. 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.
The independent refiner reported financial results for the fourth quarter of fiscal 2013 with both the top and bottom lines beating the Zacks Consensus Estimate. However, adjusted earnings and revenues compare unfavorably with the year-ago quarter. The decline was mainly due to lower refining throughput margins and higher refining operating expenses.
Estimates for this Zacks Rank #2 (Buy) company mostly moved upward in response to the solid quarterly result and a bullish outlook for 2014. The Zacks Consensus Estimate for fiscal 2014 and 2015 increased 19.9% and 16.6%, respectively, over the last 60 days. Valero failed to deliver positive earnings surprise in one of the last four quarters, with an average beat of 13.4%.
Valero remains optimistic on the ongoing economic growth projects. The company’s recently completed Diamond Green Diesel joint venture biofuels plant is operational now. Currently, Valero is evaluating options for two new crude oil topping units, which could be commissioned by the end of 2015 as well as other projects to unlock light crude capacity at Port Arthur and Meraux.
An expansion of 25 thousand barrels per day (mbpd) McKee crude unit is expected in the first half of 2015. The new hydrocracker at St. Charles refinery also commenced operations that will enhance production. These projects are expected to drive significant improvement in earnings in the future. The company also replaced all imported light sweet crude oil used at its Gulf Coast and Memphis, Tennessee, refineries with cheaper North American crude oil recently.
Further, in Dec 2013, the company came out with an initial public offering for its logistics master limited partnership (MLP) – Valero Energy Partners LP (VLP). The MLP will not only enable Valero to monetize its existing infrastructure, but would also offer a favorable financing option for future logistics projects.
However, 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 sanctions.
Key Other Picks from the Sector
Investors can also consider energy sector stocks like Helmerich & Payne Inc. (HP) and Warren Resources Inc. (WRES). All these stocks sport a Zacks Rank #1 (Strong Buy).