Raising EPS estimates, raising target, Buy Valero shares April 27, 2007
Goldman Sachs
Source of opportunity
We believe the Street consensus is woefully underestimating the earnings power at Valero Energy and other refiners over the next several years. Using a conservative $10-$11 per barrel Gulf Coast 3:2:1 refining margin, we now forecast EPS of $9.50 in 2007E, $10.50 in 2008E, and $12.00 in 2009E, which are a respective 19%, 52%, and 63% above the First Call consensus. The key to our bullish outlook is continued resilient oil demand, increasingly regular “unplanned” downtime industry-wide, and significant delays in most of the major new projects that gives us confidence in sustained high margins through at least 2009.
Catalyst
Key catalysts include: (1) positive EPS revisions we expect to 2007-2009 consensus EPS estimates; (2) additional announced delays in most new build projects; (3) further signs that oil demand remains strong; (4) news of “unplanned” downtime by industry; and (5) additional cash returned to shareholders via stock buybacks or dividend increases.
Valuation
Valero trades at just 6.9X our 2008E EPS estimate, at the low end of its 7X-13X forward EPS trading range since 2004. We see 25% upside to our revised $90 ($82 before), 12-month target price, which works out to just 8.5X 2008E EPS.
Key risks
Lower refining margins is the key risk.
Impact on related securities
Our bullish outlook for Valero is largely driven by our bullish refining margin view; hence our Attractive coverage view for the US refiners. Besides Valero, we rate Marathon Buy among refining-oriented companies, with Frontier Oil (Neutral) our favorite small-cap refiner. |
