Updated Research Report on Valero - Analyst Blog

We have maintained our Outperform recommendation on Valero Energy Corporation VLO on May 30, 2014. The company carries a Zacks Rank #2 (Buy).

Why Maintained?

Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.0 million barrels per day in its 16 refineries located across the U.S., Canada and the Caribbean. Moreover, Valero is best positioned to profit from increased refining margins mainly due to its strategic refinery structure that enables it to use cheaper oil for more than half of its needs.

Valero divested 80% stake of its retail arm, CST Brands Inc., through a tax-advantaged distribution to shareholders to unlock value on May 1, 2013. The spin-off of the company's retail arm generated an immediate net cash benefit of $500 million, after payment of $220 million in taxes. The remaining 20% stake was sold by Valero in Nov 14, 2013. We believe that the move will help the company to concentrate on its industry-specific strategies.

Management's commentary on a master limited partnership MLP opportunity bodes well. Valero filed an S-1 for a logistics MLP, Valero Energy Partners LP VLP, in September. The MLP will not only enable Valero to monetize its existing infrastructure, but is also likely to offer a favorable financing option for future logistics projects, which would then be included in the partnership.

Valero remains optimistic about the present economic growth projects. The company's recently completed Diamond Green Diesel joint venture biofuels plant is operational now. Currently, Valero is evaluating options for two new crude oil topping units, which could be commissioned by the end of 2015. The company is also assessing other projects to unlock light crude capacity at Port Arthur and Meraux. An increase of 25 thousand barrels per day (mbpd) McKee crude unit is expected in the first half of 2015.

The new hydrocracker at St. Charles refinery also commenced operations, which will enhance the company's production. These projects are likely to improve earnings significantly in the future. Recently, the company also replaced all imported light sweet crude oil used at its Gulf Coast and Memphis, TN refineries with cheaper North American crude oil.

Stocks That Warrant a Look

While we expect Valero to outperform, stocks like Encana Corp ECA, CVR Refining, LP CVRR and Matrix Service Co. MTRX are other attractive picks in the near term. All of these stocks sport a Zacks Rank #1 (Strong Buy).

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