Argus Upgrades Valero Energy To Buy, Cites 'Strong Volume, Margin Trends'

• Valero Energy Corporation VLO shares are up 11 percent in the last three months, while having lost 3 percent since December 11.
• Argus’ Bill Selesky upgraded the rating on the company from Hold to Buy, while establishing a price target of $78.
• The upgrade reflects strong volume trends and expanding refining throughput margins, Selesky stated.

Valero Energy’s 2Q15 and 3Q15 results indicated that the company had been able to achieve margin expansion owing to its ability to source relatively inexpensive crude feedstock, while also benefiting from improved pricing for gasoline and other products. Analyst Bill Selesky added that volumes are now surging, with cheap gas resulting in more miles driven.

Management is focusing on returning excess capital to shareholders via buybacks and dividend hikes, Selesky noted. Valero Energy had raised its dividend by 25 percent in October, while also reducing its share count by 5 percent from one year earlier.

“For the long term, we remain concerned about the impact on Valero if the ban on U.S. crude oil exports were to be fully or partly lifted. The impact of lifting the ban would be most intense if the price spread between Brent crude and WTI crude were large; that spread was about $9 in June 2014,” the analyst wrote.

If the spread continued to be high, Valero could lose its structural cost advantage, and suffer contraction in throughput margins and a decline in earnings. Selesky added, however, that the per-barrel oil price forecast for 2016 is in the $32-$55 range, and the widening of the Brent-WTI spread “is a concern for another day.”