Opinion on  Valero Energy Corp (VLO)     Sector: Energy  >  Industry: Oil & Gas Operations
Valero Energy Corp

BUY: Valero (nyse: VLO)
Gasoline is hitting an all-time high on a wholesale
basis, and it looks like higher prices are down
the road. You need to gird for $4.00 gasoline this
summer—perhaps even higher. Even with historic
highs in the price of crude and gasoline, the
ratio between the value of a barrel of crude oil
and the value of the gasoline you can make from
it is currently a loser for the gasoline producers.
Normally, the ratio is about 1.25, meaning that
the value of the volume of gasoline you refine
from a barrel of oil provides a 25% gross margin
to the refiner. Lately, the ratio has been at 0.95
(less than 1.00), equating to a loss—even at
today's steep prices at the pump.
Refiners have seen the price of their stocks
reflect this. Valero fell as low as $45.00 in
March 2008, down from a high just over $78.00
last year. VLO is my favorite of the refiners,
principally because it is one of the few refiners
that can process sour or heavy crude in any
quantity. Since heavy crude is becoming more
prevalent and is $10.00 to $20.00 cheaper than
light sweet crude, Valero is able to
deal with a negative spread in the
gasoline to crude ratio better than
other refiners who must rely on
more expensive light sweet crude.
Gasoline prices are going to rise this summer
until the ratio between gasoline and crude
prices recovers to its norm at 1.25. In this
process, you are going to see $4.00 at the pump,
a major jump in profitability at Valero, and a
commensurate rise in its stock price.
KEY STATS:
Recent Price: $47.80
52 Week High: $78.68
52 Week Low: $44.94
Market Cap ($BIL): $25.4
2007 Revenues ($BIL): $95.3
2007 Net Income ($BIL): $4.5
2007 EPS: $7.72
2007 Gross Margin: 8.7
2008 Est. EPS: $6.21
2008 Est. P/E: 7.3
Dividend Yield (%): 0.60
Short Interest/float (%): 1.6
Forbes Gurus---25 Stocks, ETFs and Funds for the Second Half 2008
8
(nyse: VLO)
Guru: Nikhil Hutheesing
Newsletter: Forbes Wireless