Valero on the road to recovery

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 previous quarter, 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. Ben 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 last 2 quarters, ($1.03 and $0.51) and take the earnings of the recent quarter as the annual 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.

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

About Adib Motiwala

Portfolio Manager at Motiwala Capital LLC
This entry was posted in Cyclical, Stock analysis, valuation and tagged . Bookmark the permalink.

3 Responses to Valero on the road to recovery

  1. schn1eck7 says:

    Adib, from what I know about Valero… all I can say is, be careful.

    As Buffett likes to say, why jump over 7 foot bars when you can step over 1-footers? No reason to bet on a turnaround when you can find something that has been consistent & profitable, while also selling at a good price.

  2. adibmoti says:


    I agree that investing in cyclicals is tricky and it would be easier to invest in a company that is consistently profitably while also trading at a cheap enough valuation.

    VLO is an older holding of mine. In an previous post on this blog, I laid out how I was wrong in my thinking of VLO back in 2007/2008 and bought it based on a TTM P/E that looked really cheap.

    However, now i think its the reverse situation and VLO seems reasonable to hold on. Its a small position in my overall portfolio.

  3. adibmoti says:

    It has been a decent run up for VLO in the last few months. VLO is up 50% since this follow up article in Oct 2010. It was trading for $18 back then. Today, its almost $27 and had hit a high of $30 odd a few weeks back. VLO now trades for 1.1x book value and is not such a bargain. However, if VLO continues to operate profitably and earnings increase to $2-$3 then you could see much higher prices in the $30s-$40s.