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Valero Energy: A Good Value Investment

May 26, 2014 | About:
Value Investor

Value Investor

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Value investing is what most investors would prefer in these markets and is also considered to be the best investment strategy for long term investors. Valero Energy is one such stock, which I consider to be a value pick with a low PE and EV/EBITDA, high growth prospects and a decent dividend payout.

Company With High Geographical Diversification

Valero Energy Corporation has two operational segments, Refining and Ethanol. Refining segment produces conventional and premium gasoline and other refined products whereas the ethanol segment produces ethanol and distillers grains. The company also markets its product through bulk and rack marketing network.

Valero Energy has a geographical diversified operation with two plants in California, three refineries in the Mid Continent and significant refining concentrations in U.S Gulf Coast. The company has a total of 16 refineries, which are well diversified in terms of region with a refining capacity of 2.9 million barrels a day.

Source: Company Presentation

Impressive 1Q2014 Results In Attractive Valuations

For the first quarter 2014, the company has posted net income of $828 million, a 27% increase as compared to the first quarter 2013. This increase is partially offset by a reduction from the spin-off of the retail segment. However this has resulted in EPS growth of 31%.

The EPS growth brings me to an important point. The company is currently trading at a low forward PE of 8.4. Also, a decent revenue growth, as I will discuss later, will support the earnings.

Valero currently trades at an EV/EBITDA of 5.9 which is attractive as compared to an EV/EBITDA of 15.6 and 7.6 respectively for Phillips 66 and Tesoro Corporation’s 7.6.

Valero Energy Corporation is therefore trading at an attractive valuation both in terms of PE and EV/EBITDA. This makes the company a good value investing opportunity.

Growth Drivers For The Company

A) North America Resource Growth

U.S and Canadian Shale boom offers growth in the North American resource development. There has been a significant growth in crude production since 2010 and the largest growth contributors are the U.S shale and heavy Canadian crudes.

The graph shows that there has been a significant reduction in the import of non-Canadian crude, primarily light sweet crude. Thus an increasing crude production has provided an advantage to the North American refiners and with continued production growth, refiners will continue to benefit.

Source: Company Presentation

Quebec Refinery is one of the biggest examples of how the company is benefitting from the North American crude oil boom. The company import of crude has declined to just 55% in 1Q2014 as compared to 100% foreign import in 1Q2013. This reduction in import is due to increased crude production (as discussed earlier) in addition to a more efficient transportation facility.

B) Capital Expenditure Spending Programme

Focussing on the company’s capital expenditure plan, Valero has spent $2.7 billion in FY2013 and plans to spend $3.0 billion in FY2014. Out of this, $1.5 billion is allocated to the maintenance and improvement of refining logistics in ethanol assets and the other $1.5 billion to the sustainability of the business and on projects involving the processing of cost advantage natural resources.

The graph shows that the company plans to spend 72% of its investment on logistics and light sweet crude processing. A 45% investment in logistics is primarily to access cost advantage crude and increase the export of products and crude. The planned capital expenditure plans will have a long term impact on the company’s growth and EBITDA margin.

Source: Company Presentation

C) Ethanol Segment Performance and Growth Prospect

Ethanol segment of the company has performed well and has delivered a net income of $243 million in 1Q2014, up from $14 million in 1Q13. This increase is primarily due to higher gross margin per gallon. Also, the company has acquired 110 million gallons per year ethanol plants in Mount Vernon, thus bringing the company’s total capacity to 1.3 billion gallons per year. Moreover, the company geographical presence in the middle of the U.S Corn Belt gives them a feedstock cost advantage over others.

Conclusion

Valero Energy has been fully utilizing the cost advantage and has been successful in moving their products through an improved logistics to markets where they would get significant returns and margins.

These strategies would help the company to unlock the potential of their assets and create shareholder value. Thus a company, with a decent dividend yield of 1.8% and a low valuation can be considered a good BUY.

About the author:

Value Investor
A value investor.

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