Valero Energy Corp. (VLO): Surprising 4Q07 results gives investors confidence to look forward - Goldman Sachs - 01/29/08
What's changed
Valero Energy reported better-than-expected 4Q 2007 EPS of $1.02, well ahead of the $0.64 First Call estimate and our $0.50 projection. Even allowing for $0.16 of unexpected items (related to taxes, LIFO, and insurance), results were strong. Given unplanned downtime at Aruba and minor other changes to volumes, costs, and taxes, we are modestly lowering our full-year 2008 EPS estimate to $12.00 from $12.60, though we remain well above the $7.86 First Call consensus projection for 2008. We have not changed our 2009-2012 EPS projections.
Implications
We believe Valero’s surprising 4Q results will give investors confidence to look through normal seasonal weakness in January and February and the potential for noisy 1Q 2008 results and instead look forward to the potential for a meaningful recovery in refining margins that we expect in the normally seasonally strong spring and summer periods. It remains our view that crude oil prices and crack spreads will move together over time and that risk/reward strongly favors cracks over crude at this time.
Valuation
There is no change to our $85, 12-month target price, which is based on asset value, cash flow and P/E valuation analyses.
Key risks
Key risk is sustained lower refining margins.
Impact on related securities
Within our coverage universe, all of our Buy-rated stocks are refining leveraged, including Frontier Oil (also Conviction Buy), CVR Energy (also Conviction Buy), Sunoco, Holly, and Marathon Oil. We have a favorable view of Neutral rated Tesoro as well. Across the broad energy sector, we strongly favor refining and natural gas-leveraged equities over crude oil-leveraged companies on the basis of relative risk/reward. |
