Texas-based Valero Energy Corporation (VLO), the largest independent refiner and marketer of petroleum products in the U.S., has been reiterated at Neutral.
Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.0 million barrels per day in its 16 refineries located throughout the U.S., Canada and the Caribbean.
Valero’s outstanding performance in the third quarter of 2011 can be traced back to favorable refining margins and highest refinery utilization since the third quarter of 2007.
With $2.8 billion in cash at the end of the third quarter, we think the company certainly has the financial flexibility to make aggressive purchases, thereby expanding its refining footprint.
In particular, Valero’s recently acquired Pembroke refinery is one of the largest and most complex facilities in Western Europe, with a crude capacity of 220 thousand barrels per day. Although the refinery’s light, sweet crude slate does not essentially fit the heavier, sour crude diet that characterizes Valero’s U.S. refining complex, Pembroke benefits from a sourcing advantage in the North Sea, as well as the ability to run high-acid crudes.
The company continues to progress on its numerous growth opportunities, including the new hydrocrackers at the Port Arthur, Texas and St. Charles, Louisiana plants, scheduled for completion in the second half of 2012. These projects position Valero to increase diesel production and diversify its market exposure.
However, Valero’s third quarter operating income decreased slightly primarily due to lower fuel margins and volumes in U.S. retail operations. The company also expects the fourth quarter refining margins to decline from the highs it reached during the second and third quarters.
Further, being the largest independent refiner in the country, Valero remains exposed to the ongoing unfavorable macro backdrop. Refiners in the U.S.generally face uncertainty regarding future regulations pertaining to greenhouse gas emissions and the potential for higher requirement of biofuels. Other threats include government regulations, weather conditions, crude oil and natural gas prices as well as renewable fuel prices. These can result in increased costs, reduced growth and fines or other sanctions.
Valero, which competes in the Oil Refining and Marketing industry with firms like Tesoro Corp. (TSO) and Western Refining Inc. (WNR), holds a Zacks #3 Rank (equivalent to a Hold rating for a period of one to three months).
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