What's Valero Worth Now? Back to the Drawing Board... (VLO)

Valero (VLO) stock is breathing fresh all-time highs today, and it still trades at less than 10-times forward earnings projections.  The company reported net income for the March quarter of $1.1 billion (EPS of $1.86) – up 30% year-over-year – even though revenue fell slightly to $19.7 billion, down 5.9% from the first quarter of 2006.

The reason?  Simple – throughput margins grew nearly 20%, from $10.11 per barrel to $12.06 in the first quarter.  This is an absolutely huge expansion of margins, and while partly driven by short-term supply issues, many would argue that what we’re seeing in the short-term will continue unabated in the coming quarters.  This is helping to push the stock up more than 2% today to over $72.00 as of 12:00 EST.  The stock is up over 35% this year, but still trades for one of the lowest P/E’s in the S&P 500.   

Oil to $80 a barrel?  Gas prices at $4 this summer?  We’ll leave those predictions to the oil pundits as we look towards important ongoing story that may be answered in today’s conference call, schedule to begin at 3:00 EST.  Valero has been exploring the sale of one of their 18 refineries, at facility in Ohio that has a throughput of 147,000 barrels-per-day.  When we originally picked up this story a few weeks ago, we were hopeful that a sale would reflect the inherent value in these ultra-limited refineries.

We thought the refinery could fetch upwards of $600 million based on our calculations of asset sales in the past five years.  Well, it appears that our estimates were conservative, as some whisper numbers for the Ohio refinery are approaching $1.6 billion.  Valero has reportedly received more than 10 bids already for the facility, and if any color is added by management today, we will be revisiting our VLO break-up value.  In our opinion the value of the refineries is the key to valuing the company, and based on the whisper number above, the multiple of book value that we used may be significantly higher.  That , and higher oil prices, would explain why the stock has already greatly exceeded our original conservative break-up value analysis at the end of January when energy prices were lower.  If the refinery price is truly that much higher, then the value could be far higher.

Ryan Barnes
April 26, 2007

Ryan Barnes can be reached at [email protected]; he does not own securities in the companies he covers.