VLO: Valero Energy Corp. Message Board

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Gold/Mining/Energy : VLO: Valero Energy Corp.

VLO 171.60

+1.2%

9:30 AM EST

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To: mopgcw who wrote (276)	7/13/2008 5:30:07 PM
From: mopgcw	of 299

Independent Refiners Assuming Coverage of VLO, SUN and TSO: Near-Term Risks Are High but Long-Term Value Remains ? Assuming Coverage — We are assuming coverage of the 3 major citi: 5/29/08 US refiners: VLO, SUN and TSO. VLO is our only Buy rating as the defensive play given potential asset sales & advantaged crude leverage. SUN looks cheap on asset value but expensive on earnings multiples & faces an uphill battle until crude relents. TSO’s lack of earnings diversity & higher debt levels leaves them most at risk. ? Sector View — The sector is down 40% YTD. Weaker gasoline demand in the U.S. and lagging prices for bottom of the barrel products (residual fuel) when compared to crude oil at $130 have dented sentiment. Despite these trends, refiners are reacting: proactive capacity management has whittled gasoline inventories in-line with the seasonal norm vs. 11% above 2 months ago, bringing supply and demand back into balance. ? Shareholder Value — 2008 is clearly going to be a difficult year for returns (8.9% ROIC on average). But refiners have exceeded their WACC in 10 of the past 15 years, with average returns some 4% above WACC. Our view is that refiners control their own destiny. Using our cost of capital analysis, we assume a longterm Gulf Coast 321 margin of $9.50. ? Valuation — There’s no doubt risks remain high given uncertainty of U.S. economy and record crude prices. We estimate current valuations imply industry will be EVA (ROIC-WACC) neutral, and lower levels imply value destruction. We do not believe this will happen. We recommend buying VLO today and, all else equal, would be buyers of SUN & TSO at levels 10-15% lower based on risk/reward. <snip> george

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