Buy any dip related to 3Q2007 preannouncement - Goldman Sachs - October 10, 2007
News
Valero Energy preannounced 3Q2007 of $1.30-$1.40 (excluding a special item), below our $1.75 forecast and the $1.91 First Call consensus. The company cited many of the reasons we highlighted in our “trading update” note from last week in terms of lagging price realizations for heavier products as well as narrower light-heavy and sweet-sour crude oil spreads, though the impact was greater than we had forecast.
Analysis
While 3Q now looks worse than our already-lowered expectations, we continue to believe that the transitional nature of the quarter suggests investors should not overreact. The fact that oil prices have rallied to over $80/bbl and the forward curve moved into backwardation from contango is overall positive for the refiners looking out over the next 12 months, even though it hurt in 3Q, as it is consistent with an overall bullish fundamental outlook for the broad energy sector. We continue to see $80/bbl oil prices as consistent with $14/bbl Gulf Coast 3:2:1 refining margins and wider light-heavy/sweet-sour spreads, which drives our well above-consensus EPS forecasts for 2008. As such, we are making no change to our 2008-2012 EPS forecasts. Our 2007 EPS estimate is under review.
Implications
With Valero Energy and other refiners having rallied sharply this week, a pullback seems logical given the negative preannouncement. We believe that investors should aggressively buy the dips, as there is no change to our very bullish outlook for the refining sector looking out over the next 12 months. While the transitional nature of 3Q2007 had a more pronounced negative impact on quarterly refining earnings than we expected, oil market conditions have otherwise turned decidedly bullish, which will ultimately benefit Valero and the refining sector. There is no change to our Conviction Buy rating on Valero and our 12-month price target remains $105 (based on asset value, P/E and cash flow valuation analyses; key risk is sustained lower margins). |
