Valero's (VLO) Long-Term Story Still Intact -Barron's

An article in this weekend's edition of Barron's featured Valero Energy (NYSE: VLO), the U.S.'s leading oil refiner.

While times have been tough recently, Barron's points out that shares of Valero are becoming attractive. Valero's stock has fallen about 30% this year, and trading at 7.7x EPS estimates, is very near its lowest historical P/E multiple of 7.2x.

Despite Q1 earnings guidance that is well below the Street's consensus ($0.10-$0.35, versus $0.91), Barron's believes shares of Valero could begin to see a turnaround given strong long-term prospects. The article cites a widening spread between the price of gas and the price of crude as one example. The spread at the end of Q1 was $7.43 a barrel, but several analysts believe this could increase to $10 as the summer driving season approaches.

Barron's points out that Valero's refineries are especially valuable as they have the ability to refine heavy, sour crudes, rather than only light, sweet crudes. This quality step allows the refiner to buy much cheaper crude oils and upgrade the product into some of the most expensive gases. An analyst at Deutsche Bank, Paul Sankey (quoted in the Barron's article), said "Valero will be one of the last refiners standing..." due to this competitive advantage.

Sankey has a Buy rating and $72 price target on shares of Valero, saying, "Valero trades at a 30% discount to its net asset value, even though demand for refineries is strong and Valero is aggressively disposing of assets." [BCS]

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