Long at $65.34 VALERO ticker: VLO
I’m long at $65.34. Big picture thesis looks very compelling: they are a play on the price difference between refined product and raw oil input cost.
Input costs:
WTI crude is down about 47% to $53 y/y and doesn’t look like price will be going back up:
- Saudi seems to want to maintain market share.
- Iran wildcard of possible greater supply if long awaited nuclear deal signed. Iran claims exports would rise 1.2 MM BPD to 2.3 MM BPD if sanctions lifted.
- Frackers: VLO is direct beneficiary of frackers glutting North American supply. Fracker EOG (assume it is representative) in May presentation claim have a lot of well inventory and deferred production waiting for higher prices, claim can still make money at these prices. My feeling is that low interest rates support them to keep borrowing to maintaining production in current price environment for now. EOG share price sure not suggesting any calamity, although maybe it ought to and it’s a short? Trailing p/e of 17.
- Talk now of US actually exporting oil.
Demand side:
Low interest rates + low oil price boosting economy and thus demand for refined products:
YTD June 2015 auto sales up about 4.4% to 8.5 MM units
Vehicle miles driven up 3.7% in Y/Y for April 2015 to 9.5 B vehicle miles.
- Cracking spread (42*RBOB) – WTI currently 28.6. VLO averaged about 12.28 in F14. I estimate every $1 change here adds about $92 MM to VLO’s op margin – so pro forma we’re looking very roughly at $1.5 B /yr improvement over F14 at current cracking spread ignoring all else – working to about +2/shr EPS.
Valuation is cheap.
- Analysts expect $7/shr in F15, for P/E of 9.3 vs. S&P 500 forward P/E of 17. Right there one could argue VLO should be a $120 stock – and why not higher considering VLO might be soon having its day in the sun?
- FCF positive – actually make money. Conservative balance sheet. Very manageable and low debt level.