Current VLO Stock Info

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.

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Analyst Commentary

Wells Fargo Equity Research (1.13.15)
• Summary – Q4 Estimates Higher and Lower. We maintain that new global capacity additions will likely pressure refining margins in 2015 and maintain our sector rating of Market Weight. Refer to our December 2014 update, Capacity Increases Knocking on the Door, for our fully detailed analysis. We are maintaining our 2015 EPS estimates and valuation ranges but adjusting our Q4 2014/2014 EPS estimates. Our Top 3 refiners remain PSX, TSO, and PBF.
• Q4 2014 EPS Adjustments Mixed; Maintaining 2015 Estimates For Now. Based on our throughput/margin/cash opex adjustments, we are reducing our EPS estimates for ALJ, HFC, MPC, PSX, and WNR but raising our estimates for PBF and VLO. Reductions are generally based on lower gasoline cracks (led by the Gulf Coast and Mid-Continent) partially offset by lower cash opex on lower natural gas prices. Our increased EPS estimates for PBF and VLO are mostly based on better performance in PADD I.
• East Coast Margins Held Up. We expect East Coast margins and throughputs will be weaker than Q3 but seasonally high. While distillate and gas cracks were lower than Q3, we expect higher secondary product prices will be a partial offset. This should be particularly beneficial for PBF and marginally benefit PSX and VLO, in our opinion.
• Complexity Should Outperform. Towards the end of Q4 2014, light/heavy differentials, especially for waterborne imports, generally expanded and offset a portion of the seasonally weaker crack spreads. Thus, Gulf Coast and West Coast refiners should experience better crack spread realizations than Mid-Continent or Rocky Mountain refiners.
• RINs Prices Still a Headache. The recent surge in RINs prices to ~$0.80/gal, or a 30% increase, could negatively impact gasoline capture rates in Q4 2014 and Q1 2015. Higher RINs prices have likely resulted from a combination of the EPA’s delay in issuing final standards for 2014 renewable fuel volumes, higher gasoline imports and lower wholesale gasoline prices that may negatively impact the profit margins for higher ethanol blends (E15 to E85).  

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