VLO hikes 2008E CAPEX; bullish refining view remains key to shares Goldman Sachs September 05, 2007
News
As part of an 8-K filing ahead of its September 5 presentation at a forthcoming Energy/Power Conference, Valero Energy has announced initial 2008 capital spending plans of $4.7-$5.0 billion, an increase of $1.2-$1.5 billion from the $3.5 billion it continues to expect to spend in 2007. The bulk of the variance is due to Valero’s decision to move forward with previously contemplated expansion projects at its Port Arthur and St. Charles refineries. The company also indicated it continues with a strategic review of its existing refining capacity, with the potential to divest additional refineries beyond the Lima, Ohio plant sold earlier this year. Specific refineries that may be sold have not been announced.
Analysis
Conceptually, the idea of selling “disadvantaged” facilities at close to replacement cost valuations while investing in “advantaged” facilities like Port Arthur and St. Charles makes sense. With that said, we think some investors will grumble about the additional $1.2-$1.5 billion of capital spending in 2008. We believe it will be important for Valero management to provide sufficient detail on the expansion plans to enhance investor confidence that the projects will generate strong returns over the long run using a reasonable range of refining margins.
Implications
The most important driver for Valero shares is the refining margin outlook, which in our view remains bullish looking out over the next several years. Hence, Valero remains Conviction Buy rated. However, we would not be surprised if there is some modest disappointment reflected in Valero’s share price for the higher 2008 capital spending. On the other hand, Valero has the opportunity to gain credit for “growth” projects to the extent it chooses to increase its disclosures consistent with those provided by small-cap refining companies like Frontier Oil (Neutral) and others, which appear to be getting some credit for announced growth projects. Our estimates and price target remain unchanged. |
