David Park
Ryan Ranson
“Valero Energy Corporation appears to be an attractive
investment opportunity based on its low valuation and its
dominant position in the refining and marketing industry.
Valero’s size and expertise in refining allow it to have the
lowest operating cost per barrel, giving the company a
significant advantage over other refiners. The company’s
ability to refine cheaper feedstocks also helps to increase
refining margins and thus profitability. Although the
industry is expected to experience slow growth in the
future, Valero’s strong fundamentals will allow it to return
capital to investors through dividend growth and stock
buybacks. In addition, any reversion to historical relative
valuation measures will provide investors with superior
capital gains. “
Drivers of profitability
Refining margins
Per barrel cost reduction
Refining capacities
Porter’s 5 forces
Threat of entry: Low
Power of suppliers: Medium
Power of buyers: Low
Threat of substitutes: Medium-High
Competitive rivalry: Low-Medium
What makes Valero different?
Lowest operating expense per barrel
What makes Valero different?
Capability of refining cheaper feedstocks
Economic engine
Profit per barrel refined
Value proposition
Refining at a lower cost
Current operating environment
Goodwill writedown in 4th quarter 2008
▪ Net income adjustment in analysis
Issued debt in 1st quarter 2009
Reducing capital expenditures for 2009
Agreement to buy 5 ethanol plants
Volatile refining margins
Addressed in sensitivity analysis
Government/environmental regulations
Supply of crude oil
Refinery interruptions
Integrated oil & gas competitors
Continued economic downturn
Pressure on margins
Projected Margin Per Barrel VLO Share Price Cost of Equity VLO Share Price Growth Rate VLO Share Price
$ 8.00 $ (18.00) 7.0% $ 74.24 -2.0% $ 25.45
$ 9.00 $ (4.28) 8.0% $ 59.67 -1.0% $ 26.59
$ 10.00 $ 9.44 9.0% $ 49.94 0.0% $ 27.93
$ 11.00 $ 23.16 10.0% $ 42.97 1.0% $ 29.50
$ 12.00 $ 36.88 11.0% $ 37.73 2.0% $ 31.40
$ 13.00 $ 50.60 12.0% $ 33.65 3.0% $ 33.71
$ 14.00 $ 64.32 13.0% $ 30.37 4.0% $ 36.61
$ 15.00 $ 78.05 14.0% $ 27.68 5.0% $ 40.33
15.0% $ 25.43 6.0% $ 45.30
16.0% $ 23.52 7.0% $ 52.26
17.0% $ 21.88 8.0% $ 62.72
18.0% $ 20.46 9.0% $ 80.20
19.0% $ 19.20 10.0% $ 115.30
20.0% $ 18.09
Refining margins
Out of Valero’s control, but helped by sour crude
Operating cost per barrel
Already a leader but current levels are high
historically
Utilization rates/capacity
Do not necessarily need to expand but cutting
capacity will reduce profitability