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Adib Motiwala
Adib Motiwala
Articles  | Author's Website |

Valero on the road to recovery

October 26, 2010 | About:
Via Bloomberg "Valero Energy Corp., the largest U.S. oil refiner, beat analysts’ estimates and reported its second consecutive quarterly profit after rising prices for gasoline and other fuels outstripped the cost of crude. Net income for the quarter was $292 million, or 51 cents a share, compared with a year-earlier loss of $629 million, or 61 cents, San Antonio-based Valero said in a statement. Per-share profit was 5 cents more than the average of 16 analysts’ estimates compiled by Bloomberg.

Sales rose 20 percent to $22.2 billion as output rose 6.8 percent.

In the 2nd quarter, I posted a short comment Has Valero turned the corner ". VLO reported a profit of $583 million ($1.03 per share) compared to a loss of $254 million ($0.48 per share) in 2Q,2010.

VLO feels confident about the recovery and has increased its capital spending budget by $300 million for 2011 from this year’s budget of $2.3 billion.VLO may also be looking to buy refineries in Europe, CEO Bill Kleese said on the call today.

Asset Sales Valero agreed to sell two refineries this year to PBF Energy Co. LLC, the partnership led by Petroplus Holdings AG Chairman Thomas O’Malley and backed by private-equity firms Blackstone Group LP and First Reserve Corp. It completed the sale of its money-losing Delaware City refinery to PBF in June for $220 million. The refinery in Paulsboro, NJ will be sold for $360 million.

The company agreed to sell its 50 percent stake in a crude- oil pipeline system yesterday to Genesis Energy LP for $330 million.


In July, I posted an example on how to value cyclical companies such as Valero.

Graham said that a P/E ratio based on last years earnings is of limited use and instead suggested to look at the "average earnings" over a business cycle.

Computing the average EPS for VLO over the 10 year period from 2000 - 2009, I arrived at earnings per share of $2.62.

Also, if you consider the earnings of the ast 2 quarters, ($1.03 and $0.51) and take the earnings of the recent quarter as the run rate, you can say that VLO may earn $2 / share. At the recent price of $18, VLO trades about 9x earnings this number. Using the average EPS of $2.6, VLO trades at 7x earnings.

It helps to look beyond the headline P/E number reported on websites like Yahoo Finance.

Disclosure: I have a Long position in VLO at the time of writing.

About the author:

Adib Motiwala
Adib Motiwala is a Portfolio Manager at Motiwala Capital LLC, an investment management firm that manages separate accounts for its clients.

Visit Adib Motiwala's Website

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GuruFocus has detected 3 Warning Signs with Valero Energy Corp $VLO.
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