Valero Energy VLO is a leading refining player with a robust network of 14 refineries located across the United States, Canada and Peru. The company has a combined throughput capacity of 3 million barrels per day and a Nelson Complexity Index of 11.5, implying that its refineries can process a wide variety of feedstock into higher-value refined products like diesel and jet fuel. VLO is also involved in the production of low-carbon fuels like renewable diesel and ethanol.
Over the past year, VLO stock has gained 88.1%, outperforming the industry’s 38.4% growth. Its peers, Phillips 66 PSX and Marathon Petroleum Corporation MPC, have grown 40.3% and 52.5%, respectively, during the same time frame. While price performance indicates a stock's attractiveness to some extent, it would be wiser to closely examine the company’s current business environment before offering any investment advice.
Refining Business Drives Valero's Strength
Valero’s Gulf Coast refining network benefits the company through feedstock sourcing and exposure to high-demand product markets. In its first-quarter earnings calls, the company mentioned that its Gulf Coast presence enabled it to take advantage of discounted heavy sour barrels and optimize the product slate at its refineries, maximizing the production of high-value products like jet fuel.
Valero’s structural advantage stems from the operational flexibility of its refineries. The company's system can process a wide range of crude qualities (heavy sour, light/medium sour, etc.) and also shift product yields between light products and distillates based on market dynamics to enhance margin capture during volatile times. Notably, its feedstock flexibility and ability to maximize heavy sour crude processing are expected to act as a tailwind into the second quarter as well.
Image Source: Valero Energy Corporation
Favorable Industry Conditions Support Refining Margins
The macroeconomic backdrop also remains favorable. Heavy sour crude grades usually trade at a discount to the West Texas Intermediate benchmark. Crude oil prices have also softened considerably in recent weeks, closing at approximately $68.55 per barrel on July 6. This is expected to benefit VLO as it could reduce feedstock costs for the refining player, improving refining economics and supporting better margins.
Beyond favorable feedstock costs, broader industry fundamentals remain constructive. Management noted that global refining capacity remains constrained, while the demand for refined products is resilient. Moreover, low product inventories in key markets are expected to support refining fundamentals, keeping margins steady.
Expansion Beyond Traditional Refining
Valero has gained meaningful exposure to renewable fuels, providing an additional revenue stream. Its ownership in the Diamond Green Diesel joint venture provides VLO with approximately 1.2 billion gallons of renewable fuels production capacity per year. The recently completed Port Arthur sustainable aviation fuel (SAF) project can upgrade up to 50% of its current renewable diesel production capacity to SAF.
In addition, VLO’s ethanol operations are benefiting from increased international demand for the fuel. Management highlighted that many countries are increasing the amount of ethanol blended into gasoline to reduce emissions and costs. Global renewable fuel mandates are incentivizing producers to include low-carbon fuels in the transportation fuel mix, thereby driving demand for ethanol.
These initiatives position Valero to capitalize on the growth of cleaner transportation fuels in the long run.
Valuation Snapshot
The valuation snapshot indicates that investors are now willing to pay a premium for Valero Energy due to the company’s strong fundamentals. This is reflected in VLO’s trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 8.24x compared with the broader industry average of 5.5x. However, it is currently trading cheaper compared to its peers, PSX and MPC, which are trading at 12.69x and 11.18x trailing 12-month EV/EBITDA, respectively.
Time to Bet on the Stock or Wait?
Valero Energy is expected to benefit from its Gulf Coast refinery network, which provides it with feedstock flexibility and access to attractive export markets. Further, the operational flexibility of its refining system enables the company to shift product yields in response to changing market conditions, supporting profitability and improving margin capture.
Considering the backdrop, it might be wise for investors to wait for a more opportune moment to own VLO, currently carrying a Zacks Rank #3 (Hold), as the stock appears somewhat overvalued. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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