Shares of leading U.S. independent refiner Valero Energy Corporation (VLO) has been down approximately 25% since we downgraded the company to Sell in the last week of May. The Texas-based marketer of petroleum products has seen its common stock fall to the current level of $15.57, just $1.63 away from its 52-week low of $13.94.
With the outlook for domestic refiners remaining bleak, we see little reason for investors to own the stock as the ongoing long-term fundamental changes to the industry suggest future struggles. The major factor that could have a sobering influence on refining profitability is the shifting balance in global supply and demand, with capacity additions outpacing incremental demand.
Valero’s worse-than-expected second-quarter outlook has further added to this negative sentiment. The country’s largest refiner expects to post a loss of $0.50 per share during the three months ending June 30, 2009, down significantly from a prior projection of $0.59 per share in profits.
At the same time, Valero announced a 40 million common share offering, subsequently priced at $18 per share, as the company tries to improve its balance sheet through capital raising efforts. This has diluted the stock’s value even more.
While near-term financial results will be poor, we also believe that cash flows will be highly volatile throughout the refining cycle. We see limited room for margins gains over the coming months, given the current gasoline and distillate inventory levels and the overall low utilization rate.
Given these headwinds, we expect Valero to underperform the broader equity markets in general and the oil and gas group in particular. We therefore maintain our Sell recommendation ahead of the company’s second quarter results, expected on July 28. Tesoro Corporation (TSO), the other refinery stock in our coverage universe, is also rated a Sell.
Read the full analyst report on “VLO”
Read the full analyst report on “TSO”
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