We have upgraded our recommendation for Valero Energy Corp. (VLO) to Outperform from Neutral based on impressive first quarter results as well as improved 2011 earnings visibility.
Valero posted solid first quarter 2011 earnings results on the back of a strong refining margins environment and better feedstock discounts. Company-wide, throughput margins jumped $3.93 per barrel year over year in the quarter owing to higher margins for diesel and jet fuel, along with better discounts for heavy-sour feedstocks on the Gulf Coast and light-sweet crude oils in the Mid-Continent. This favorable margin scenario was reflected across all regions barring the Northeast.
Among all independent refiners, Valero offers the most diversified refinery base with a footprint in all major regions of the U.S., having a refining capacity of 2.6 million barrels per day in its 14 refineries located throughout the U.S., Canada and the Caribbean. The company’s impressive refining portfolio, strong balance sheet, accompanied by domestic as well as worldwide diversification make it the most trusted name within the refining space.
With $4.13 billion cash on hand as of March 31, 2011, we believe the company undeniably has the financial flexibility to make acquisitions, thereby expanding its refining footprint. Its growth initiatives, including the new hydrocrackers at the Port Arthur, Texas and St. Charles, Louisiana plants scheduled for third quarter 2012 and fourth quarter 2012, respectively, are expected to boost diesel production and diversify its market exposure.
Importantly, Valero’s recently acquired Pembroke refinery in Wales, one of the largest and most complex facilities in Western Europe and with a crude capacity of 220 thousand barrels per day, as well as other major growth projects are expected to lend strong earnings momentum in 2011.
The Pembroke refinery will not only allow greater flexibility in shipping products between the U.K. and the U.S. but also facilitate Valero’s trading platform across the Atlantic Basin.
Hence, we expect Valero to be well differentiated from most other U.S. independent refiners given the company’s constant endeavors in reviewing its refining portfolio and upgrading the asset base by selling or acquiring refinery assets that fit the business mix.
Valero, which competes with Sunoco Inc (SUN) and Tesoro Corp. (TSO), holds a Zacks #1 Rank, which is equivalent to a short-term Strong Buy rating.
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