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Ticker: VLO
Sector:Oil & Gas Refining &
Marketing
Valero Energy Corp. (VLO)
Company Profile
Recommendation: SELL
(all 530 shares)
Pricing
Closing Price
52-wk High
52-wk Low
$67.18 (09/28/07)
$78.68 (07/10/07)
$47.52 (10/04/06)
Market Data
Market Cap
Trading vol
$37.48B
10.34M (3mon avg)
Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield
$10.01
6.76
0.43
0.70%
Profitability & Effectiveness (ttm)
ROA
14.37%
ROE
34.21%
Profit Margin 6.91%
Oper Margin 10.00%
Valero Energy Corporation operates as a crude oil refining
and retailing company. Its refining activities include
refining operations, wholesale marketing, product supply
and distribution, and transportation operations primarily in
the Gulf Coast, Mid-Continent, West Coast, and northeast
regions. The company produces reformulated gasoline,
conventional gasoline, California Air Resources Board
Phase III gasoline, customized clean-burning gasoline
blends, clean-burning oxygenates, gasoline blendstocks,
low-sulfur gasoline, low-sulfur diesel and ultra low-sulfur
diesel, jet fuel, aviation gasoline, kerosene, home heating
oil and stove oil, petrochemicals, asphalt, lube base oils,
sulfur, crude mineral spirits, bunker oils, petroleum coke,
and Propane-Octene. As of July 31, 2007, Valero Energy
owned and operated 17 refineries in the United States,
Canada, and the Caribbean with a combined throughput
capacity of approximately 3.1 million barrels per day. Its
retailing activities include the sale of transportation fuels at
retail stores and unattended self-service cardlocks;
convenience store merchandise through its retail sites;
and home heating oil to residential customers in the
United States and Canada. As of the above date, the
company operated through 5,800 retail and branded
wholesale outlets in the United States, Canada, and the
Caribbean under various brand names, including Valero,
Diamond Shamrock, Shamrock, Ultramar, and Beacon.
Valero Energy was founded in 1955. It was formerly
known as Valero Refining and Marketing Company and
changed its name to Valero Energy Corporation in 1997.
The company is headquartered in San Antonio, Texas.
Products



ANALYST
Varun Chikhliwala
[email protected]

Reformulated gasoline (RFG)
Conventional gasoline
Premium grades of reformulated and conventional
gasoline
California Air Resources Board (CARB) Phase III
gasoline
1
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
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Customized clean-burning gasoline blends for export markets (i.e., Mexican
CARB)
Clean-burning oxygenates
Gasoline blendstocks (alkylate, raffinate, naphtha, reformate)
Low-sulfur gasoline (less than 30 ppm) -- Atlanta grade
Low-sulfur diesel and ultra low-sulfur diesel (less than 15 ppm)
Jet fuel (commercial and military)
Aviation gasoline
Kerosene
Home heating oil and stove oil
Petrochemicals (mixed xylenes, benzene, toluene, chemical- and refinery-grade
propylene)
Asphalt
Lube base oils (industrial and automotive)
Sulfur
Crude mineral spirits
Bunker oils
Petroleum coke
Propane -- Octane
Competitive Forces
Historical Stock Price
The performance of Valero has been very volatile compared to the S&P 500 over the last 2 years.
So it is a risky stock in a risky industry.
2
Market Position
The performance of Valero has been very volatile compared to the S&P 500. But so have the
prices for Chevron and Exxon Mobil, which have performed better than Valero in this current
period. This is overall a very volatile industry.
Competition
Valero is an extremely small company in terms of market cap compared to its larger competitors
like BP, Chevron and Exxon Mobil with a market cap of less than a third of its closest
competitor. It has a lower quarterly YoY revenue growth rate, gross margin, operating margins,
price/earnings ratio, and peg ratio than its competitors and the industry as a whole. It does have a
higher EPS than any of the competitors and the industry.
VLO
BP
CVX
XOM
Industry
Market Cap:
37.21B
221.16B
199.49B
513.36B
4.51B
Employees:
21,836
97,000
62,500
106,400
2.48K
Qtrly Rev Growth (yoy):
-5.50%
-0.40%
4.00%
-1.00%
14.60%
Revenue (ttm):
88.41B
263.89B
189.82B
366.24B
8.35B
Gross Margin (ttm):
13.05%
19.01%
33.39%
34.89%
14.83%
3
EBITDA (ttm):
10.12B
34.25B
34.59B
72.36B
1.42B
Oper Margins (ttm):
10.00%
9.31%
13.99%
16.49%
13.34%
5.97B
21.15B
18.89B
40.28B
494.54M
10.008
6.47
8.725
6.988
4.98
P/E (ttm):
6.71
10.72
10.73
13.25
9.70
PEG (5 yr expected):
0.43
1.84
1.5
1.89
0.98
P/S (ttm):
0.42
0.83
1.05
1.41
0.83
Net Income (ttm):
EPS (ttm):
BP = BP plc
CVX = Chevron Corp.
XOM = Exxon Mobil Corp.
Industry = Oil & Gas Refining & Marketing
MSN Money Screener
For the MSN Stock Screener, I used the recommendations form the Portfolio Committee report.
I used the below mentioned parameters based on the recommendations
 Industry sector: Oil & Gas Refining and Marketing
 Market cap: Large cap
 S&P 500 membership
 Price/earnings ratio: As low as possible
 Net profit margin: As high as possible
 Relative strength: As high as possible
 Debt/equity ratio: As low as possible
 Revenue growth: As high as possible
Rev
Net
Symbol
MRO
Debt to
P/E
Growth
Company
Profit
Market
Equity
Ratio:
Name
Margin
Capitalization
Ratio
Current
Marathon Oil
Ord Shs
S&P Index
Industry Membership
Year vs
Year
8.20
39 Bil
0.29
8.10
OilGasRef
S&P 500
3.30
6.74
37 Bil
0.38
6.90
OilGasRef
S&P 500
11.80
5.41
21 Bil
0.44
13.40
OilGasRef
S&P 500
23.50
4.31
13 Bil
0.25
19.80
OilGasRef
S&P 500
20.50
2.92
9 Bil
0.77
7.50
OilGasRef
S&P 500
14.70
Valero
VLO
Energy Ord
Shs
HES
MUR
SUN
Hess Corp
Murphy Oil
Corp
Sunoco Inc
4
Recent News
Valero restarts fuel production in Port Arthur following Humberto1
After surviving the aftermath of Hurricane Humberto last week, the workers in Port Arthur
have completed the facility's intensive start-up process and limited fuel production has
begun. They was forced to shut down the 325,000-barrel-per-day refinery in Southeast
Texas after the hurricane knocked out power to the area.
Valero reports "strategic asset review"2
Valero Chairman and Chief Executive Bill Klesse is scheduled to discuss a "strategic asset
review" of the company’s 16 North American refineries, with sales or acquisitions possible. "It's
taking a look at our entire portfolio," said Valero spokesman Bill Day. "That could include a
sale, an acquisition, a joint-venture, an asset swap."
Spend millions for pollution controls3
Valero agreed to pay a $4.25 million penalty and spend $232 million to upgrade pollution
controls at refineries in Tennessee, Ohio and Texas after reaching the agreement with the Justice
Department and the Environmental Protection Agency to come into compliance with the Clean
Air Act, the Justice Department said. Under the agreement, new pollution controls will be
installed at refineries in Port Arthur, Texas; Lima, Ohio; and Memphis, Tennessee.
Risk Factors4
Volatile refining margins
The financial results are primarily affected by the relationship, or margin, between
refined product prices and the prices for crude oil and other feedstock. It also depends
on, among other things, the availability and quantity of imports, the production levels of
domestic and foreign suppliers, levels of refined product inventories, U.S. relationships
with foreign governments, political affairs, and the extent of governmental regulation.
Compliance with and changes in environmental laws
The principal environmental risks associated with the operations are emissions into the
air and releases into the soil, surface water, or groundwater. Violation or failure to
comply with the laws and regulations could result in fines or other sanctions. Because
environmental laws and regulations are becoming more stringent and new
environmental laws and regulations are continuously being enacted or proposed, the
level of expenditures required for environmental matters could increase in the future.
1
http://www.bizjournals.com/sanantonio/stories/2007/09/17/daily23.html
http://uk.reuters.com/article/oilRpt/idUKN0443792920070904
3
http://online.wsj.com/article/SB118732125741300762.html
4
2006 Valero 10-K filing
2
5
Disruption of ability to obtain crude oil
A significant portion of the feedstock requirements is satisfied through supplies
originating in Saudi Arabia, Mexico, Iraq, Kuwait, Venezuela, Colombia, and Africa. So
they are subject to the political, geographic, and economic risks attendant to doing
business with suppliers located in, and supplies originating from, those areas. If they are
unable to obtain adequate crude oil volumes or are able to obtain such volumes only at
unfavorable prices, their results of operations could be materially adversely affected,
including reduced sales volumes of refined products or reduced margins as a result of
higher crude oil costs.
Competitors
Competitors that produce their own supply of feedstock, have more extensive retail
outlets, or have greater financial resources may have a competitive advantage. They
are after all a much smaller company than some of the other competitors like BP,
Chevron and Exxon Mobil.
Valuation
The first step is to calculate the discount rate, or the rate of capitalization. I use the risk free rate
of 3.82% which is based on the 90-day T-Bill rate, the beta of 0.72 from Google Finance, and a
market rate of 10.23%.
Discount Rate
K=Rf+β(Rp)
K=3.82+0.72(10.23-3.82)
K=8.44%
Based on the above calculation, the required discount rate is 8.44%. But because this is a volatile
stock in a volatile industry, investors’ need a higher return on their investments. So I’ve
increased the discount rate by 20%, i.e. a discount rate of 10.13 %.
Warren Buffett Way Owners' Earnings Discount Model
I use the Warren Buffett Way Owners' Earnings Discount Model for my valuation. Analysts on
yahoo finance have predicted a growth rate of 22.4% over the next 5 years. So if I use a second
phase growth rate of 3%, the company is under-valued. So based on the analysts’ estimates if I
take a growth rate of 20%, I get an intrinsic value of $118.61 per share. The Owner’s Earnings
Discount Model is computed as under:
Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of
Owner Earnings in 2006:
Net Income
Depreciation
10.13%
$
$
5,463,000,000.00
1,155,000,000.00
6
Amortization
Capital Expenditures
Owner Earnings
$
$
$
(3,187,000,000.00)
3,431,000,000.00
Year:
Prior Year Owner Earnings
First Stage Growth Rate (add)
Owner Earnings
Discounted Value per annum
$
$
Sum of present value of owner
earnings
2006
3,431,000,000.0
20.0%
4,117,200,000.0
$4,117,200,000.0
$24,621,667,674.1
Residual Value
Owner Earnings in year 10
Second Stage Growth Rate (g) (add)
Owner Earnings in year 11
Capitalization rate (k-g)
Value at end of year 10
$
$
$
Present Value of Residual
Intrinsic Value of Company
8,537,425,920.0
3.00%
8,793,548,697.6
7.13%
123,331,678,788.22
$46,991,385,597.98
$71,613,053,272.11
Shares outstanding assuming dilution
Intrinsic Value per share
603760000
$118.61
Analysts’ Opinions
Looking at analyst’s opinions on both Yahoo Finance and Msn Money, there are analysts that
recommend selling the stock. This is very interesting because using the Warren Buffett model
the stock is under-valued. This means that there are analysts who believe that either this stock is
at its high point and not going to grow any further, or its risks do not match potential gains from
the stock.
Current Month
Last Month
Two Months Ago
Three Months Ago
Strong Buy
4
4
5
5
Buy
6
6
5
5
Hold
7
6
5
7
Sell
2
1
1
1
Strong Sell
1
2
2
0
Yahoo! Finance
7
Analyst Ratings
Recommendations
Current
1 Month Ago
2 Months Ago
3 Months Ago
Strong Buy
5
5
6
5
Moderate Buy
1
1
1
1
Hold
8
7
5
6
Moderate Sell
0
0
1
1
Strong Sell
1
2
2
1
Msn Money
Recommendation
Based on the valuations, the volatility of the stock, and most importantly the fact that we need to
reduce our holdings in the Oil & Gas sector, I recommend that we sell the shares of Valero. I
think on its own it is a good stock, but I think there are better stocks in this sector that we can
buy or hold. It has a total market value of $35,605 which constitutes about 2.5% of our portfolio.
All else being the same, it would mean our holdings in the OIL & Gas sector at around 9.83%,
which would bring us close to the recommended 9% mark for this sector.
8
Income Statement
(Amt in millions)
2006
2005
2004
2003
2002
Revenue
91,833.0
82,162.0
54,619.0
37,968.6
29,047.9
Total Revenue
91,833.0
82,162.0
54,619.0
37,968.6
29,047.9
Cost of Revenue, Total
81,267.0
74,547.0
49,897.0
35,243.1
27,194.8
Gross Profit
10,566.0
7,615.0
4,722.0
2,725.5
1,853.1
1,401.0
1,316.0
1,138.0
993.0
932.9
Research & Development
0.0
0.0
0.0
0.0
0.0
Depreciation/Amortization
1,155.0
840.0
605.0
510.5
449.3
Interest Expense (Income), Net Operating
0.0
0.0
0.0
0.0
0.0
Unusual Expense (Income)
0.0
0.0
0.0
0.0
0.0
Other Operating Expenses, Total
0.0
0.0
0.0
0.0
0.0
8,010.0
5,459.0
2,979.0
1,222.0
470.9
-210.0
-266.0
-260.0
-261.3
-285.7
0.0
0.0
0.0
0.0
0.0
389.0
94.0
-9.0
25.9
-35.5
Income Before Tax
8,189.0
5,287.0
2,710.0
986.6
149.7
Income Tax - Total
2,726.0
1,697.0
906.0
365.1
58.2
Income After Tax
5,463.0
3,590.0
1,804.0
621.5
91.5
Minority Interest
0.0
0.0
0.0
0.0
0.0
Equity In Affiliates
0.0
0.0
0.0
0.0
0.0
U.S. GAAP Adjustment
0.0
0.0
0.0
0.0
0.0
5,463.0
3,590.0
1,804.0
621.5
91.5
0.0
0.0
0.0
0.0
0.0
5,463.0
3,590.0
1,804.0
621.5
91.5
Selling/General/Administrative Expenses,
Total
Operating Income
Interest Income (Expense), Net NonOperating
Gain (Loss) on Sale of Assets
Other, Net
Net Income Before Extra. Items
Total Extraordinary Items
Net Income
Msn money
9
Balance Sheet
(Amt in millions)
2006
2005
2004
2003
2002
Cash and Short Term Investments
1,590.0
436.0
863.6
369.2
378.9
Total Receivables, Net
4,421.0
3,634.0
1,838.7
1,327.7
1,558.2
4,430.0
4,039.0
2,317.8
1,913.1
1,436.1
Prepaid Expenses
145.0
65.0
44.6
44.9
37.6
Other Current Assets, Total
174.0
172.0
199.7
162.4
125.6
Total Current Assets
10,760.0
8,346.0
5,264.4
3,817.3
3,536.4
Property/Plant/Equipment, Total - Net
21,098.0
17,856.0
10,317.4
8,195.1
7,412.0
Goodwill, Net
4,211.0
4,926.0
2,401.2
2,401.7
2,580.0
303.0
298.0
310.7
320.2
341.1
0.0
327.0
264.6
264.5
0.0
Assets
Total Inventory
Intangibles, Net
Long Term Investments
Note Receivable - Long Term
0.0
0.0
0.0
0.0
0.0
1,381.0
1,045.0
833.3
665.4
595.7
0.0
0.0
0.0
0.0
0.0
37,753.0
32,798.0
19,391.6
15,664.2
14,465.2
Accounts Payable
6,864.0
5,563.0
2,963.4
2,288.2
1,825.0
Payable/Accrued
0.0
0.0
0.0
0.0
0.0
510.0
581.0
519.2
355.6
294.2
Other Long Term Assets, Total
Other Assets, Total
Total Assets
Liabilities and Shareholders' Equity
Accrued Expenses
0.0
0.0
0.0
0.0
476.7
Current Port. of LT Debt/Capital Leases
Notes Payable/Short Term Debt
476.0
222.0
411.6
0.0
0.0
Other Current Liabilities, Total
972.0
1,009.0
639.3
420.5
410.8
8,822.0
7,375.0
4,533.5
3,064.3
3,006.7
4,657.0
5,156.0
3,901.2
4,245.1
4,866.6
4,047.0
3,615.0
2,011.2
1,604.6
1,240.7
0.0
0.0
0.0
0.0
116.0
1,622.0
1,602.0
1,147.7
1,015.0
926.9
19,148.0
17,748.0
11,593.6
9,929.0
10,156.9
Total Current Liabilities
Total Long Term Debt
Long Term Debt
Capital Lease Obligations
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred Stock
0.0
0.0
0.0
0.0
0.0
Preferred Stock - Non Redeemable, Net
0.0
68.0
208.1
200.5
0.0
Common Stock
6.0
6.0
2.6
2.4
1.1
10
Additional Paid-In Capital
7,779.0
8,164.0
4,357.5
3,921.4
3,436.7
Retained Earnings (Accumulated Deficit)
11,951.0
6,673.0
3,199.6
1,482.7
913.6
Treasury Stock - Common
-1,396.0
-196.0
-198.5
-41.4
-42.0
265.0
335.0
228.7
169.6
-1.1
Total Equity
18,605.0
15,050.0
7,798.0
5,735.2
4,308.3
Total Liabilities & Shareholders’ Equity
37,753.0
32,798.0
19,391.6
15,664.2
14,465.2
Other Equity, Total
Msn money
Cash Flow
(Amt in millions)
2006
2005
2004
2003
2002
Net Income/Starting Line
5,463.0
3,590.0
1,804.0
622.0
91.5
Depreciation/Depletion
1,155.0
840.0
605.0
511.0
449.3
0.0
0.0
0.0
0.0
0.0
290.0
255.0
345.0
287.0
1.5
Non-Cash Items
-452.0
83.0
23.0
-432.0
-61.2
Changes in Working Capital
-144.0
1,082.0
203.0
429.0
-208.8
6,312.0
5,850.0
2,980.0
1,417.0
272.3
-3,187.0
-2,133.0
-1,292.0
-976.0
-811.2
216.0
-2,767.0
-1,393.0
-355.0
1,059.8
-2,971.0
-4,900.0
-2,685.0
-1,331.0
248.6
143.0
-13.0
-8.0
10.0
-13.7
-184.0
-106.0
-79.0
-51.0
-42.3
Issuance (Retirement) of Stock, Net
-1,898.0
-389.0
201.0
276.0
56.5
Issuance (Retirement) of Debt, Net
-249.0
-874.0
71.0
-371.0
-412.9
Cash from Financing Activities
-2,188.0
-1,382.0
185.0
-136.0
-412.4
1.0
4.0
15.0
40.0
1.0
1,154.0
-428.0
495.0
-10.0
109.5
436.0
864.0
369.0
379.0
269.4
1,590.0
436.0
864.0
369.0
Amortization
Deferred Taxes
Cash from Operating Activities
Capital Expenditures
Purchase of Fixed Assets
Other Investing Cash Flow Items, Total
Cash from Investing Activities
Financing Cash Flow Items
Other Financing Cash Flow
Total Cash Dividends Paid
Foreign Exchange Effects
Net Change in Cash
Net Cash - Beginning Balance
Net Cash - Ending Balance
378.9
Msn money
11