Valero Energy Corp

Valero is currently benefiting from a recovery in refining margins, which have expanded to record levels due to disruptions in the Gulf and Russia, alongside a low inventory position. The global refining system is operating at near maximum utilization rates, and with little new refining capacity under construction, Valero's operations are expected to remain exceptionally profitable. The manager highlights Valero as the largest of the US refiners, indicating a strong competitive position in a favorable market environment.

Valero Energy's earnings beat expectations, and refiners like Valero are positioned to benefit from lower product inventories. The overall outlook for refiners is positive as they are expected to capitalize on the current market dynamics, which include tight crude supply and rising demand for refined products. This positions Valero favorably within the North American energy sector, suggesting continued growth potential.

During the quarter, we initiated and added to our positions in several refinery names, including Valero. This reflects our strategy of starting small and adding opportunistically, allowing us to build positions slowly rather than chase events. Our exposure to energy, which represented 12.2% of the strategy, has been beneficial, particularly as the sector has been on a capital diet following excessive capital expenditure in the last decade. This disciplined approach to capital allocation is expected to improve returns on capital, making Valero a compelling investment.

In the first quarter, the fund's equity portfolio significantly outperformed, driven by an overweight in the strong-performing energy sector. Specifically, Valero Energy Corp. contributed positively as geopolitical turmoil pushed up commodity prices. This positioning reflects our belief in the resilience and potential of Valero amidst market fluctuations, making it a valuable addition to our portfolio.

Valero Energy Corporation (VLO) is a multinational manufacturer of liquid transportation fuels, operating 15 petroleum refineries and 12 ethanol plants. The company has produced strong shareholder returns by optimizing its return on invested capital and generating significant free cash flow. VLO benefits from a structural advantage through U.S. natural gas, which provides a lower cost base compared to many global refiners. Additionally, industry consolidation has increased economic value for Valero, and we believe the shares will provide additional outperformance for our funds.