Valero Energy Corp. (VLO) Buy: Adding Valero Energy to Americas Conviction Buy List - Goldman Sachs - March 18, 2008
Source of opportunity
We are adding Valero Energy to the Americas Conviction Buy List, with 49% upside to our $69 12-month target price. Valero shares are trading only slightly above our $45 “low-end” valuation, as investors have capitulated over the last week on any hopes of a recovery in refining margins this year. It remains our view that crack spreads are very inexpensive relative to crude oil prices, with an expected convergence favoring the refiners relative to the rest of our coverage universe.
Catalyst
The key driver of Valero shares we think will be a recovery in the gasoline crack spread from current depressed levels. While weak gasoline demand trends and higher ethanol supply have negatively impacted margins this year, we do not think recent negative gasoline crack spreads are sustainable. We believe that gasoline crack spreads, at a minimum, will rally heading into summer and that refining equities can rally sharply off of recent lows.
Valuation
We see 49% total return upside to a $69, 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower refining margins.
Impact on related securities
We believe a recovery in refining margins would broadly benefit refining-leveraged equities, with our other favorites including Buy-rated Frontier Oil and Sunoco. We also see meaningful upside for Neutral-rated Holly Corp., Tesoro, and Marathon Oil. |
