Oil and gas company Valero Energy Corporation (VLO) reported impressive results in the last reported quarter. Its EPS beat analyst estimates by 2.9%, while its revenue came 7.3% higher than the consensus estimate.
VLO’s Chairman and CEO Joe Gorder said, “Refining fundamentals remain strong as product demand through our system has surpassed 2019 levels, while global product supply remains constrained due to capacity reductions and high natural gas prices in Europe are setting a higher floor on margins.”
VLO significantly reduced its total debt in the third quarter. Its total debt came in at $9.60 billion, compared to $13 billion at the end of the first quarter of 2021. VLO reduced its debt by $1.25 billion in September. Its debt-to-capitalization ratio was approximately 24% at the end of the third quarter, compared to 40% at the end of March 31, 2021.
Tight supply due to the European Union embargo effective next month and OPEC+'s decision to stick with oil output cuts, along with sustained energy demand, are expected to drive energy prices higher.
The US Energy Information Administration (EIA), in its November Short-Term Energy Outlook (STEO), revised up the price of brent crude for 2022 to an average of $102.13 per barrel and the West Texas Intermediate (WTI) to $95.88. For 2023, it expects the price of Brent to average $95.33 per barrel and WTI to average $89.33 per barrel.
The agency expects global oil consumption to outpace global oil production next year, contributing to rising oil prices in the second half of 2023. Therefore, VLO should benefit.
The company pays a $3.92 per share dividend annually, which translates to a 2.76% yield on the current price. Its four-year dividend yield is 5.09%. Its dividend payouts have grown at a CAGR of 2.9% over the past three years and 7% over the past five years. The company is expected to pay a quarterly dividend of $0.98 per share on December 8, 2022.
Shares of VLO have gained 89% in price year-to-date and 101% over the past year to close the last trading session at $141.98.
Here’s what could influence VLO’s performance in the upcoming months:
Robust Financials
VLO’s revenues increased 50.6% year-over-year to $44.45 billion for the third quarter ended September 30, 2022. Its operating income increased 447.2% year-over-year to $3.79 billion.
The company’s adjusted net income attributable to VLO increased 413% year-over-year to $2.79 billion. Its adjusted EPS came in at $7.14, representing an increase of 436.8% year-over-year.
Favorable Analyst Estimates
Analysts expect VLO’s EPS and revenue for the fourth quarter ending December 31, 2022, to increase 177% and 21.9% year-over-year to $6.84 to $43.75 billion, respectively. It has surpassed consensus EPS estimates in each of the trailing four quarters.
Its EPS and revenue for fiscal 2022 are expected to increase 880.3% and 55.8% year-over-year to $27.55 and $177.60 billion, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, VLO's 5.15x is 34.9% lower than the 7.92x industry average. Its forward P/S of 0.31x is 79% lower than the 1.47x industry average. Also, the stock's 3.62x trailing-12-month EV/EBITDA is 34.9% lower than the 5.55x industry average.
Mixed Profitability
In terms of trailing-12-month ROCE, VLO’s 47.68% is 130.5% higher than the industry average of 20.68%. Likewise, its 15.88% trailing-12-month ROA is 130.7% higher than the industry average of 6.88%. Furthermore, the stock’s 2.90% trailing-12-month asset turnover ratio is 354.9% higher than the industry average of 0.64%.
On the other hand, its trailing-12-month gross profit margin of 9.94% is 75.9% lower than the 41.19% industry average. Its trailing-12-month net income margin of 5.71% is 49.9% lower than the 11.38% industry average.
POWR Ratings Show Promise
VLO has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. VLO has a B grade for Value, consistent with its discounted valuation.
It has an A grade for Momentum. This is justified as the stock is currently trading above its 50-day and 200-day moving averages of $120.60 and $111.78, respectively, indicating an uptrend.
VLO is ranked #4 out of 94 stocks in the B-rated Energy – Oil & Gas industry. Click here to access VLO’s Growth, Stability, Sentiment, and Quality ratings.
Bottom Line
VLO’s revenue and net income have increased at 16.8% and 59.7% CAGRs, respectively, over the past three years. The company could continue to report strong earnings with the expected rise in crude oil prices. Moreover, its refinery optimization projects are progressing on schedule and will help reduce costs and boost margins.
The Arthur Coker project, expected to be completed in the first half of 2023, will increase the refinery’s throughput capacity. Also, the DGD project, with a production capacity of 470 million gallons per year, is expected to become operational this month.
Given its strong fundamentals, solid growth prospects, attractive dividends, and discounted valuation, it could be wise to buy the stock now.
How Does Valero Energy Corporation (VLO) Stack up Against Its Peers?
VLO has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Energy – Oil & Gas industry with an A (Strong Buy): Marathon Petroleum Corporation (MPC), PBF Energy Inc. (PBF), and Epsilon Energy Ltd. (EPSN).
VLO shares were trading at $138.73 per share on Wednesday afternoon, down $3.25 (-2.29%). Year-to-date, VLO has gained 91.32%, versus a -14.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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