Goldman Sachs upgrades Valero on improved margin outlook, balanced valuation

Investing.com -- Goldman Sachs upgraded Valero Energy Corp (NYSE: VLO) to "Neutral" from "Sell," pointing to improved long-term margin potential and a more balanced valuation.

The brokerage set a new price target of $127, implying a total return of 15%.

The analysts cited three main factors for the upgrade: consensus revisions that better reflect a slowdown in refining profitability, an improving crude environment driven by OPEC’s addition of heavy barrels, and a more constructive supply backdrop following large refining closures such as LyondellBasell’s Gulf Coast plant.

While noting the continued uncertainty in demand, Goldman Sachs said Valero’s relatively healthy balance sheet and strong cash flow generation should support shareholder returns, estimating a capital return yield of about 9%.

Goldman also noted that Valero shares have underperformed Marathon Petroleum (NYSE: MPC) and the XLE (NYSE: XLE) this year.

However, shares have meaningfully outperformed the S&P by roughly 119% in around 5 year period, supported by oil demand recovery, consistent dividend payments, and operational execution.

Risk/reward screens as more balanced, the analysts wrote, highlighting the company’s capital allocation strategy and expectations for favorable crude differentials and strong free cash flow.

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