Valero Energy Corp. (VLO): Removing from Conviction Buy List given near-term headwinds - Goldman Sachs - May 09, 2008
What happened
We are removing Valero Energy from the Conviction Buy List, owing to the list’s stop loss rule as well as continued near-term headwinds. We are maintaining our Buy rating, however, given Valero’s inexpensive valuation and exposure to widening light-heavy crude oil spreads, which we think can mitigate weak gasoline margins. Since being added as to the Conviction Buy List on March 18, 2008, Valero shares are -7.6% versus -1.1% for our coverage group, +10.7% for the XOI and +5.0% for the S&P 500. Over the last 12 months, Valero shares are -37.2% versus -7.3% for the S&P 500.
Current view
We recently downgraded our refining sector view to Neutral from Attractive after lowering our gasoline crack forecasts on continued weakness in US gasoline fundamentals. Despite our tempered outlook, we continue to see long-term value in the sector and expect a rebound in gasoline cracks heading into the summer driving season. However, emerging headwinds include further potential negative 2Q 2008 Street EPS revisions and liquidity concerns for some refiners (though not Valero) that we think increase the risk of additional near-term downside; hence our removal of Valero from the Conviction List, which is meant to reflect our best near-term catalyst-driven ideas. To be clear, we are not concerned about balance sheet health for Valero though its shares could well get dragged down further by generally bearish sector sentiment, in our view. We continue to see longer-term value in the shares of both Valero and Frontier Oil (also Buy-rated) given current inexpensive valuations and leverage to both light-heavy crude oil spreads and rising middle distillate production. There is no change to our $60, 12-month price target for Valero, which based on asset value, P/E and cash flow valuation analyses. Key risk is sustained lower refining margins. |
