Despite the tumbling price of oil, Valero looks to sustain expenditures and continue to grow dividends
Valero (ticker: VLO), the world’s largest independent refiner, released a presentation last week setting the company’s many objectives for 2015. In the face of the challenging market, Valero has implemented goals to maintain capital expenditures and grow dividends next year.
In the company’s presentation, VLO said that it would be focusing on capital allocation to increase benefits to stockholders. VLO set three non-discretionary goals, as well as three discretionary goals for 2015 in its presentation. The non-discretionary targets the company has set include sustaining capital expenditures, maintaining dividend growth and holding the company’s debt-to-market cap ratio of 20% to 30%. Valero has marked stock buybacks, capital expenditure growth and acquisitions as discretionary.
According to Wells Fargo Equity Research, this represents a change of pace for Valero, which has historically focused on growth and investment over shareholder returns. VLO’s dividends have increased year-over-year since 2011. Its most recent dividend, declared October 23, 2014, was $0.275 per share. Wells Fargo expected the change to be a positive one for Valero, saying, “we expect to see improved valuation overall.”
The company said it would be sustaining its high end capex at an estimated $1.5 billion annual “stay-in-business” spend in order to maintain reliable operations. Valero also said that maintaining its target debt-to-cap ratio was in order to maintain the company’s investment grade credit rating.
The company has labeled stock buybacks a discretionary expense in order to maintain flexibility to return cash, reduce share count and manage capital, according to VLO. The company hopes that the other two main discretionary expenses, growth capex and acquisitions, will help to prioritize payback opportunities and enhance future returns. Wells Fargo said they “anticipate that this will result in sustainable increases in dividend payout.”
Valero and other downstream producers have been much more insulated from the falling price of oil, which has led many upstream producers to slash capital expenditure budgets for next year. In a new survey from Barclays covered by OAG360®, the banking company expected to see an 8.8% or greater decline in global spending from E&P companies in 2015. The average guidance for 26 E&P companies compiled by EnerCom showed a 27% decline from 2014 budgets. Despite oil prices leading to substantial cuts in the E&P sector, downstream companies like Valero continue to focus on maintaining their budgets while still giving back more to their stockholders.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.