Valero Energy-Magellan Midstream Arms To Construct Pipeline

An independent refiner, Valero Energy Corporation (NYSE:VLO) announced that one of its indirect wholly-owned affiliate V-Tex Logistics, LLC has entered into a deal with Magellan Pipeline Company, L.P., an indirect wholly-owned subsidiary of Magellan Midstream Partners, L.P. (NYSE:MMP) .

Projects

Per the agreement, both companies would jointly construct a 16-inch pipeline that will spread over 135 miles from Houston to Hearne, TX.

Valero Energy also stated that it would build terminals in Hearne and Williamson County, TX. A 12-inch pipeline– that will stretch over 70 miles–would also be constructed to link both the terminals. The estimated cost of the projects is valued at $380 million. These projects are slated to be concluded by mid-2019.

Benefits from the Projects

The booming Central Texas markets are expected to benefit the most as the construction of these pipelines and terminals will present an alternative unwavering source of fuel. With a capacity to provide about 60,000 barrels per day into Williamson County, the new pipelines and terminals will extend the supply chain of Valero. These projects are in sync with the company’s long-term plan of expanding through organic growth projects.

Being one of the largest independent refiner and marketer of petroleum products in the United States, Valero Energy is favorably positioned to profit from increased refining margins. The company will benefit from its strategic refinery structure that enables it to use cheaper oil for more than half of its requirement. These expansion projects help Valero in providing a ratable product outlet and improve margin capture. Moreover, long term agreements for terminals and rail provide a cushion against macro uncertainties.

Valero Energy expects to spend $1 billion annually on growth investments through 2021, of which about 50% is to be allocated for refining and the remaining 50% for logistics projects. Some of the projects being developed by the company include Diamond Pipeline, Wilmington cogeneration unit, Diamond Green Diesel expansion and Houston alkylation unit, among others.

About the Company

Valero Energy offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The company’s share price has gained 7.8% compared with the industry’s increase of 6.1% over the last three months amid oil price volatility. However, we are concerned about the company’s escalating debt levels over the past six quarters.

Zacks Rank & Key Picks

Currently, Valero Energy carries a Zacks Rank #3 (Hold). A few better-ranked players in the energy sector include Transmontaigne Partners LP (NYSE:TLP) and Range Resources Corporation (NYSE:RRC) . Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Transmontaigne, headquartered in Denver, CO, involves in transporting and storing refined petroleum products. The firm delivered an average positive earnings surprise of 6.60% over the last four quarters.

Based in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of U.S. oil and gas resources. The company’s 2017 earnings are estimated to grow 1587.17%.

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