Goldman on Valero, Premcor, and Sunoco
Valero Energy (IL/A): Bellwether R&M executing well under a strong macro environment February 01, 2005
As the bellwether R&M company, Valero Energy continues to execute well, capturing robust realized refining margins while maintaining solid crude throughput levels. Given VLO's complex refining system and exposure to all regions of the US, we believe VLO will continue to perform well and, given liquidity in the shares, we believe investors will naturally flock to the bellwether R&M company in a strong macro environment. However, despite seeing significant absolute upside in VLO shares, we continue to prefer Premcor (OP/A) among the R&M pure-plays as we see a better relative risk/reward in PCO shares. In our view, PCO offers commensurate exposure to heavy-sour differentials at a less expensive 2006E valuation. We also view the pending joint venture between PCO and EnCana (OP/A) as highly favorable. Although it is a very close call, Sunoco (IL/A) remains our second favorite overall R&M pick over Valero. While we view Premcor as our favorite refining pure-play, we see Sunoco as better suited for long-term investors or investors that are bullish in both the refining and chemicals cycle. We see Sunoco's combination of capital stewardship, focus on returns, cash returned to shareholders, and dual leverage to refining and chemicals as very attractive to shareholders over the long-run. Having said that, we note that because of the currently wide heavy-sour crude differentials (to which Sunoco has less relative exposure), Sunoco shares appear more expensive than Valero on 2005E and 2006E multiples. We estimate Valero shares have 44% total return upside to our super-spike- adjusted peak value of $81, which compares to the peer group having on average 59% upside. Excluding super-spike optionality, Valero has 11% upside to a $63 traditional peak value. Valero shares currently trade at 5.6X, 5.5X, and 7.8X EV/DACF for 2005, 2006, and normalized 2007, versus the peer group trading on average 6.1X, 5.6X, and 8.1X EV/DACF, respectively (see Exhibit 1). Valero reported adjusted 4Q 2004 EPS of $1.89, well ahead of our $1.51 forecast and the $1.44 First Call consensus estimate. 4Q results appear even more impressive given that in the quarter, Valero recorded $165 million of pre-tax hedging losses related to forward sales on heat cracks, which we estimate to be a $0.38 per share after-tax impact. Higher-than- expected realized refining margins, driven primarily by wide heavy-sour and high-acid sweet crude differentials, largely explains the variance between our estimate and actual reported results. We are introducting quarterly 2005 EPS estimates for Valero, which stand at $1.76, $2.04, $1.57, and $1.29 for 1Q, 2Q, 3Q, and 4Q 2005. We have updated our full-year 2005, 2006, and normalized 2007, 2008, 2009, and 2010 EPS estimates, which now stand at $6.65 ($5.89 before), $6.75 ($6.25 before), $3.60 ($3.40 before), $3.65 ($3.43 before), $3.66 ($3.42 before), and $3.69 ($3.43 before). Our updated EPS estimates reflect higher assumed heavy-sour differentials, lower interest expense, and minor other adjustments.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
