Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (41315)	9/11/2005 6:58:04 PM
From: Wyätt Gwyön	Respond to of 110194

Do you think VLO will continue to have such rich margins for years to come? right now is of course a special condition which nobody expects to continue. nevertheless, increasingly strict environmental regulations around the world and in US will reduce availability of lower-quality product as well as MTBE phase-out in US, meaning US will be required to attract MORE imports, putting a consistent upward pressure on margins. at the same time, capacity growth is still restrained and is forecast to grow only 1.6% next year (pro forma, before any refineries wiped out by bad weather or explosions from being run too close to capacity a la BP get "expensed"). right now of course the crack margins are ridiculously high. VLO make no representations that this will continue at this level--they probably don't want it to as it attracts too much attention to an industry that doesn't want it. if you look at that recent presentation i posted to you a couple days ago, it shows the pre- and post-Katrina margins. customer.talkpoint.com they gave a presentation on 4/25 where they forecast $13.94 EPS next year. this was based on their initial, ridiculously conservative assumptions for the Premcor acquisition, as well as margins for 06 implied by the forward curve. subsequently, as of 8/26 (pre-Katrina), crack margins had increased 17% on the forward curve. post-Katrina, crack margins were up between 50-53% on the forward curve as of 8/31 (post-Katrina). on the call VLO mgmt said they expect the margins to decline to somewhere in the middle of this 17-53% increase (iow, they expect it to go down, just not to pre-Katrina levels, which in any case were well above their levels when they predicted ~$14 EPS next year). i don't know about their EPS sensitivity to the margins, but that is obviously an important variable. as with any business with a larged fixed-cost base, i would expect leverage to be high (this was the big argument for investing in FCX several years ago, when it went from the teens [actually from $10 post-Bali bombing panic] to more than $40 in the space of a year or so). also note that VLO is eating more than half a billion from hedges this year but they are not hedged on 06, so that is an extra $1.68/shr. i reckon they will get at least $3.35/shr out of incremental efficiencies from PCO and capital project benefits coming online, so that plus the lack of hedge losses is $5/shr. on top of that if the margin improvement from 4/25 is just $3/shr then that is $22/shr. that is the basis for my back-of-the-envelope prediction. what is the First Call consensus? $9.56. it's a good thing analysts are so well-paid for their "expertise". if they had to make money by investing they'd all be in trouble. listen to the presentation. do the numbers yourself and see what you come up with. i have talked to a lot of people who are sorry that they let VLO "get away" (people said the same thing about QCOM at $5), but personally i am not convinced the run is anywhere near complete.