Energy

Why Valero Energy Has Significant Upside Despite Lower Expectations for Refiners

Jon C. Ogg

Published: April 15, 2020 12:28 pm

Last Updated: April 15, 2020 12:29 pm

As all kinds of energy companies have struggled, some investors may have hoped that the lower oil prices could boost the refining segment. In the case of Valero Energy Corp. (NYSE: VLO), the company has withdrawn its first-quarter and full-year guidance for 2020. Shares may have retreated, but at least one research firm sees significant upside that, while less than optimistic, could still be considered positive.

Valero’s guidance issued on Tuesday called for revenues to come in between $20.1 billion and $22.2 billion for the first quarter. Unfortunately, that came with a projected loss attributable to its shareholders of $1.83 billion to $2.1 billion. The company expects that the coronavirus demand destruction for oil and refined products has been and likely will remain significant. Valero has started lowering its volumes at most refineries, has idled some facilities and has lowered production of jet fuel and ethanol. Valero also is delaying some capital projects and has entered into an $875 million credit facility.

Independent research firm Argus has maintained its Buy rating on the stock. The firm did slash its target price to $61 from $110 in Wednesday morning’s call, but the new target still implies upside of almost 30%, before considering its dividend.

Argus’s adjusted target reflects the impact of lower crude oil prices and the COVID-19 pandemic while praising its balance sheet strength. Argus believes that Valero is well positioned to manage a potentially long period of low oil prices, with a diversified portfolio that includes refining, midstream, chemicals, marketing and specialty operations. The firm noted that this favorable mix already has proven to be valuable in different commodity price environments in recent years. Argus also believes that Valero’s cash flow will be less volatile than that of most pure-play refiners it competes against.

One additional note here is that Valero’s long history of returning excess cash to its investors via dividends and share buybacks keeps it attractive as well. Valero returned $591 million to stockholders in the fourth quarter of 2019 alone, with $222 million used for share repurchases and $369 million in the form of dividends. Just on January 23, 2020, Valero raised its quarterly dividend by 9%. The new quarterly payout of $0.98 per share, or $3.92 per share annually, generates close to a 7.9% yield, and Argus currently sees Valero’s dividends at $4.03 per share for 2020 and $4.07 per share for 2021, based on a payout ratio of 40% to 50%.

Argus lowered earnings expectations for 2020 and 2021:

We are lowering our 2020 EPS estimate to $1.37 from $9.21 based on the impact of the pandemic and our lower revenue forecast for the year. The consensus is $1.48. We believe the consensus will fall as analysts revise their estimates. … We are also lowering our 2021 EPS estimate to $4.85 from $10.13, again reflecting the fallout from the coronavirus and our view that volume growth (though improving from 2020) will be slow to recover. The 2021 consensus is $5.38.

Valero trades at 36.8 times the Argus 2020 earnings (EPS) estimate and at 10.4 times the firm’s 2021 forecast, versus a longer-term average of 10 to 15 times. Its price-to-book multiple of 1.3 is below the midpoint of a historical 1.1 to 1.8 range, and its price-to-sales multiple of 0.3 is at the midpoint of a longer-term range.

Jefferies recently was quite positive in the refiners, although that has not stopped the stock from remaining weak. Valero also has been among some contrarian pick lists as well.

Valero Energy stock traded down nearly 9% at $46.39 on Wednesday in midday trading. Its 52-week range is $31.00 to $101.99, and the Refinitiv consensus price target is closer to $75.00.