The Case For, And Against, Valero

Barron's makes the case for Valero in its recent issue. The stock is down 30% this year after an 8 fold stretch as oil made its march toward $100 a barrel. Valero recently projected lower earnings, but analyst are expecting a bump coming into the summer driving season. At issue for Valero are the crack spreads. Recent short-lived negative spreads have became positive again at $7.43 a barrel. The recent spreads are well below the $40 a barrel from last summer, but above the $3.50 a barrel average of the 1990s. Analysts are expecting at least $10 spreads in the near future. Valero is also expected to generate cash by selling some of its 17 refineries, which should command a nice price given that not only is it near impossible to build a new refinery (at least in the U.S., and certainly not in a short amount of time), but the Valero refineries are also able to refine the heavier, sour crudes. Given demand, earnings forecasts, and stock buybacks, analysts see profitability, even without selling refineries. Deutsche Bank has a price target of $72, 64% above the recent price (as of 4/12/08). No doubt that Valero has been beaten down, but a number of things need to occur to reverse the recent slide, some of which may be outside their control. Recent chart activity also looks poor, and the trend is in the wrong direction. Picking a bottom at this point and trying to be a hero may not be the best strategy. Giving up a little upside to see if the story has changed is probably worth the wait.


Ticker: VLO