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Valero Energy Has Become A 'Show Me' Story Now

Valero Energy Has Become A 'Show Me' Story Now
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JPMorgan said in a note Valero Energy Corporation (NYSE: VLO) has now become a "show me" story, but does that justify an upgrade?

The firm says no, and downgraded shares of Valero Energy from Overweight to Neutral. However, this status did afford the stock an adjusted price target to the upside, from $75 to $78.

Analysts Phil Gresh, John Royall and Anthony Yu think the stock has already received some multiple uplifts due to more stable returns recently and improved capital discipline under the direction of CEO Joe Gorder. The analysts are of the view, for a further uplift, it could take some time, given the cyclical nature of the industry.

JPMorgan believes 2016 was not a recession for refining, despite the year being tough on it. Rather, the firm said the industry was beset by problems arising out of capacity additions outpacing demand growth. Although the year was potentially below "mid-cycle," the firm thinks it was not a trough.

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The firm said its hypothetic downside case suggested that free cash flow should not be as bad as 2009, assuming Valero maintains capital discipline. The firm feels the free cash flow would be adequate to cover the dividend, although it feels buyback could be cut to zero.

As such, the firm is encouraged by Valero's improved free cash flow profile and commitment to return capital, leading up to some multiple enhancement already, but it thinks achieving a more significant multiple upgrade could take time. The firm estimates the total return potential from Valero's stock, including the dividend, to be 6 percent compared to 7 percent for the group.

Image Credit: By Zereshk - Own work, CC BY 3.0, via Wikimedia Commons

Latest Ratings for VLO

Jan 2019Goldman SachsUpgradesSellNeutral
Jan 2019MacquarieUpgradesNeutralOutperform
Jan 2019PiperJaffrayAssumesOverweight

View More Analyst Ratings for VLO
View the Latest Analyst Ratings

Posted-In: Anthony Yu Joe GorderAnalyst Color Downgrades Price Target Commodities Markets Analyst Ratings Best of Benzinga


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