We are maintaining our long-term Outperform recommendation on Valero Energy Corporation (VLO) with a target price of $26.00 per share. Valero is one of the largest independent retailers of refined petroleum products in the central and southwestern U.S. and in eastern Canada, with more than 5,800 retail outlets under various brand names, including Diamond Shamrock, Valero, Ultramar and Beacon.
The company returned to profitability in 2010 with further improvements expected throughout 2011 and 2012 as the economy recovers on higher diesel demand (including overseas), better sour oil discounts and cost cutting. Valero’s ability to process cheaper sour and heavy oil is an added competitive advantage.
Valero continues to progress on its numerous growth opportunities, including the new hydrocrackers at the Port Arthur, Texas and St. Charles, Louisiana plants scheduled for the third and fourth quarters of 2012, respectively. We believe these projects position Valero well to increase diesel production and widen its market exposure.
Further, the Pembroke refinery acquisition as well as major growth projects slated for completion in 2012 will benefit from high crude and low natural gas prices.
In the second quarter, Valero’s earnings from continuing operations missed the Zacks Consensus Estimate but surpassed the prior period earnings by a huge margin. The growth was backed by an overall improvement in the refining environment and higher feedstock discounts.
However, we are a little wary about revisions to Valero’s operating guidance for the third quarter of 2011, with refinery throughput volumes reduced to the range of 370,000 to 380,000 barrels per day (bpd) in the Mid-Continent region from the original estimate of 420,000 to 430,000 bpd. The company has also increased its company wide refinery operating expenses to $4.05 per barrel from the original estimate of $3.80 per barrel.
Valero, which competes with Sunoco Inc. (SUN) and Chesapeake Energy Corporation (CHK), currently, holds a Zacks #2 Rank, implying a short-term Buy rating.
