VLO

[Ramsburg]

Note: Michael will update this trade later, he asked me to add this position to the 3SOV portfolio today.

Trading Plan:
Buy VLO today at or near the open.

Regards,

[metro]

I think he may have meant this i as a short?

http://tinyurl.com/ezxdm

-- for maybe a month no charts show up for me - only the name??

[Michael]

I think he may have meant this i as a short?

-- for maybe a month no charts show up for me - only the name??

Hi Metro,

You should know me better. The only thing I am short of is beer

If you have problems finding a chart let me show you one:



This is a 3-year chart for Valero and I have deliberately removed everything except the PE and the stock price because that is the core of this pick.

The long-term ascending trend is obviously very strong. But to pick stocks is always a matter of timing and that is why I have included the PE.

VLO is trading at a trailing PE of 8 and every time this has happened the stock has responded very nicely.

Short term the picture is much more complex:



There is some support at 62 but as clear as the long-term chart is as confusing is the short-term chart. I think that the most important in these cases is to understand why the chart reflects uncertainty and that requires a better understanding of Valero's business.

Let me make a long story very short: Valero is the largest Independent US refiner. The refinery business has been extremely profitable in general as the demand for gasoline has increased without the refinery capacity increasing at the same rate. Basically the investment to build a refinery is huge and nobody wants to have a refinery in their backyard so no new refineries have been built for years.

What makes Valero an even better investment case is that most of their refineries are using sour crude, which is cheaper than sweet crude. The spread between sweet and sour crude has contributed to Valero's extremely strong performance the last couple of years.

Unfortunately the supply of sour crude to US was partly disrupted as a result of corrosion of the pipeline to BP's oil field in Alaska. The pipeline might take a few month to repair and that might narrow the spread between sweet and sour crude. Here is Valero's take on the disruption:

Chairman and founder Bill Greehey said sour crude discounts, which have contributed to record refiner profits in the past few years may narrow because of the cut in Alaska North Slope crude output.

"That's sour crude," Greehey said. "That's going to hurt us. You know the discount from sour crude to sweet crude will narrow a little bit."

Greehey declined to speculate on the impact on prices of a cut in Alaska oil production announced on Sunday by producer BP Plc. to fix a leaking pipeline.

So we have a temporary problem which might slightly reduce VLO's earnings in this quarter and the stock respond with a 10% drop to fall back to the long term trend line.

The market is sometimes so shortsighted that it wouldn't be able to recognize a dollar note from toilet paper even if you put it right in front of it and I think that is exactly what is happening here.

Valero reported Q2 earnings on the 1st of August and earnings increased with almost 100% to 2.98 per share. At the same time they issued the following guidance

"Valero achieved record earnings in the first half of 2006, and we expect the second half of the year to be even better. In fact, the third quarter is off to an unprecedented start. In July, Gulf Coast gasoline margins averaged $22 per barrel and on-road diesel margins averaged $18.75 per barrel, while sour crude oil discounts remained wide. For August and September, Gulf Coast gasoline margins are trading in the futures market at $21 per barrel and $17 per barrel, respectively, while Gulf Coast on-road diesel margins are trading around $18 per barrel for August and $19.50 per barrel for September. Given this margin environment, we expect that our third quarter earnings will be better than what we earned in the second quarter and substantially higher than the current average analyst estimate.

Even with the disruption of sour crude from Alaska I would expect VLO to report earnings next quarter of at least $2.5 per share but you can put in any figure you want because it is really not important for the long term stock price of VLO. The pipeline will be repaired and the spread will go back to the normal level within a month or two.

With this in mind I believe that VLO is trading at a normalized PE of $5 to $6 and that is extremely cheap for a company that is experiencing an extremely strong demand and growing earnings consistently over the last 4 years.

[Michael]

Well we could have chosen a better entry point on Valero but this was never meant to be a short-term investment.

Oil has been flirting with 70 for the last couple of days and it has taken it toll on Valero's share price.



The oil price is at a critical support level:



I am personally bullish on oil now. The Asian growth story will continue to fuel the increase in oil prices. It seems for me that the US domestic stock levels are getting to much attention. Who cares about a potential drop in consumption in US if 2 billion Chinese and Indian are going to buy their first car in the next 10 years?

But here is the interesting part. Valero has consistently outpaced the increase in the oil price. In fact if oil had experienced the same increase in price as VLO during the last 5 years oil would be trading at $175. Valero's profitability is not depending exclusively on the increase in energy prices as many other oil picks but rather in the spread between sour crude and sweet crude and the shortage of refinery capacity.

We will continue to hold Valero. The price might continue to fluctuate short term but this is long term a great investment. VLO has been growing EPS with 206% the last 3 years and 38% over the last 10 years. To be able to buy a stock like that at a PE of 6.4 for this year is close to daylight robbery.

[stocky]

Like always great pick and analysis. Applaud.

[AussieTrader]

Just my thoughts on VLO from a purely technically point of view. Note, I do not hold a position in VLO, but kinda wish I did about 3 years back

[metro]

The stock is now getting close to a possible buy point support. It is a lower risk place to buy as if support does not hold you exit with no very tiny loss.

http://tinyurl.com/z2zto

if support does break could short it to 52 or maybe 48 though safer to wait for it to fall then climb back up to trend line. However right now it is at lower Bollinger band so likely to bounce at support

[la-onda]

downgrade and down again...


Citigroup Cuts Sunoco, Valero Energy to Hold
Analyst Doug Leggate says the downgrades reflect ongoing margin weakness and his view that second-half earnings per share may fall below consensus forecasts

From Standard & Poor's Equity Research
Citigroup downgraded Sunoco (SUN ) and Valero Energy (VLO ) to hold from buy.

Analyst Doug Leggate says the downgrades reflect ongoing margin weakness and his view that second-half earnings per share may fall below consensus forecasts. While there's normally a fall in refining margins after the summer driving season, he thinks the decline this year could be exacerbated by a shift back to winter grade gasoline, which could alleviate much of the blending difficulties that supported margins during much of 2006. Leggate also notes that U.S. product inventory levels have recovered from recent lows.

The analyst cuts his 2006 earnings per share estimate for Valero from $9.05 to $8.83, and his $79 price target to $65. He also trimmed his Sunoco 2006 EPS forecast from $8.15 to $7.75, and $90 target to $81.

[la-onda]

presentation from 7th of Sept.:

http://media.corporate-ir.net/media_files/NYS/VLO/presentations/Lehman_0906.pdf

time for entering coming soon, oversold ??

highlights attached below:

[la-onda]

ZACKS research:
Bull of the day:
Price target 65$
please check the attached file !

&
yahoo quotation:

Focus on VLO: An Unwarranted Laggard
Shares of Valero have fallen 20% over the past month, underperforming its
refining peers (SUN, TSO, FTO, WNR) by 8% and refining-heavy integrateds
(MRO, COP, HES) by 9%. We believe that this performance lag is unwarranted,
given the following factors:
Benefit of a strong purchasing and marketing platform. The past month has
shown evidence of refining volatility taken to an extreme. We believe that VLO is
best positioned among the refiners and integrateds to take advantage of this
volatility through its broad purchasing and product marketing and trading
platforms. A key competitive advantage of VLO is its ability to respond to
changing market conditions by leveraging its broad geographic crude purchasing
capabilities and its advantaged position as a product marketer in all major U.S.
regions, thus capturing greater margins than benchmark indicators would
suggest.
For example, although Maya crude oil differentials have tracked modestly below
our expectations, the opportunity to substitute Maya for other heavy grades has
increased significantly over the past month. Looking at three heavy crude
grades: Maya from Mexico, Lloyd from Canada and Arab Heavy from Saudi
Arabia, shows that the spread in pricing between the three has grown significantly
over the past month. We believe VLO offers a unique advantage in its ability to
capture this volatility in regional crude supplies due to its complex refineries and
supply flexibility.
Use of free cash should support share price
Valero offers the most attractive free cash flow yield among the independent
refiners currently. We expect the company to use this free cash flow to
aggressively buy back shares, particularly with the recent pullback in share
prices.
More evidence of limited North American heavy oil processing capacity
growth
Part of our Buy investment case on VLO has been that its overall complex asset
base is undervalued relative to the cost of replacing those assets in the market
today, given rising M&A costs (Come-by-Chance and Lyondell-Citgo) and rising
construction costs across the industry. In addition, we believe delays and cancellations of heavy oil processing expansions in North America are likely to
extend the plateau of strong refining margins through the end of the decade.
Further evidence of this was highlighted in John Herrlin's September 5th comment
on ConocoPhillips, where he highlights the company's likely shift in downstream
capital investment focus away from North America and toward Europe (where a
recent German refinery purchase was made) and Saudi Arabia (where COP will
jointly build a grass roots refinery). Our read on this is that some COP projects
planned for the U.S. are likely to be pushed back or cancelled altogether. This is
not insignificant given that COP had previously targeted a $4-$5 billion growth
capital program for U.S. refining.

[Michael]

Hi La-onda,

Thanks for posting the research. You are a star!!!!.

Interesting downgrade from Citigroup. With an EPS of 8.83 the stock is trading at a PE of below 6. I will not question their EPS forecast but I honestly find their downgrade very peculiar.

VLO has over the last 12 month generated 7.8 billion of cash. That means that they are trading at P/CF of 4. Unless the oil market totally collapses which is unlikely I don't see this CF go down during this decade.

Now that means that within the next 4 years the company has generated more cash than the total market cap of the company.

It seems we will have to have a lot of patience with Valero. But as a long-term value investment it can't be much better than VLO.

[la-onda]

UPDATE 1-Valero CEO says '06 capital budget up $200 million
Thu Sep 7, 2006 12:19 PM ET

HOUSTON, Sept 7 (Reuters) - Valero Energy Corp. <VLO.N> Chief Executive Bill Klesse said on Thursday the company's 2006 capital budget was expected to rise by $200 million to $3.7 billion due to higher construction and maintenance costs.

Valero previously projected a capital budget of $3.5 billion for the year.

Speaking to a Lehman Brothers conference call of Wall Street analysts, Klesse said, for example, the costs for welders and pipefitters on the Gulf Coast had risen 30 percent because of reconstruction after last year's hurricanes.

Klesse, who took over as chief executive in January, has stressed financial discipline this year as the company pays down debt and buys back stock.

The company, which grew under Klesse's predecessor, Bill Greehey, to be the largest U.S. refiner through acquisitions, bypassed bidding on the Lyondell-Citgo refinery in Houston to stay within its capital budget.
Valero continues to look for refineries to buy, Klesse said.
"We're very much in the acquisitions business," he said. "However, we're not going to chase them. They're going to be projects that meet our investment criteria."
Bids for the Lyondell-Citgo refinery were over $5 billion, beyond the expectations of refining executives and analysts.

Wall Street analysts, on average, forecast Valero will reap profits of $5.8 billion on revenue of $95 billion for 2006.

Klesse said he expected a tight motor fuels supply and demand balance, which has fueled U.S. refiner profits, to continue into the foreseeable future.
Valero has also improved its returns by purchasing and configuring refineries that can process cheaper high-sulfur, high-density crude oils. The recent drop-off in oil prices has led to speculation that the discount for such heavy, sour crude would narrow in the future.

"Sour crude discounts should remain wide in the future," Klesse said.

He said prices for sweet crude, like benchmark West Texas Intermediate, would continue between $60 and $70 per barrel.
One factor keeping those discounts wide will be the increasing supply of crude from Canadian oil sands in the coming years, Klesse said.

[la-onda]

Valero Gets $289 Million Contract
Thursday September 7, 6:21 pm ET
Defense Department Awards Valero $289 Million Contract for Jet Fuel

WASHINGTON (AP) -- The U.S. Defense Logistics Agency on Thursday awarded a contract worth about $289 million to a business unit of Valero Energy Corp. for jet fuel.
The contract supports the Defense Energy Support Center at Fort Belvoir, Va., and another location in Benicia, Calif., according to the Defense Department.
Contract work is scheduled to be complete by Oct. 30, 2007.
Shares of Valero rose 27 cents to close at $53.29 on the New York Stock Exchange.

&

Valero says move to new diesel spec going well
Thu Sep 7, 2006 5:48 PM ET

NEW YORK, Sept 7 (Reuters) - The transition to a new ultra-low sulfur diesel fuel specification in the United States is "going well," major U.S. refiner Valero Energy Corp.'s <VLO.N> refining chief Richard Marcogliese said on Thursday.

The comment from the nation's largest producer of fuels comes after widespread worries earlier this year that the new federal green diesel requirements would trigger price spikes and supply shortfalls.

"The Valero transition is going well," Marcogliese, executive vice president, refining operations, said. "We are producing as much on-road diesel as we did before the rule went into effect."

U.S. refiners are in the process of cutting sulfur content in on-road diesel fuel to 15 parts per million from 500 ppm to adhere to new federal environmental regulations, with an aim to improve air quality.

Pollution from diesel with a high sulfur content has been blamed for increased incidents of asthma and other respiratory diseases, health experts have said.

The transition started in June, with refiners phasing in production, and retail stations will be required to have the new blend no later than Oct. 15.

Because most diesel fuel moves through pipelines, refiners actually have to produce fuel with only 10 ppm to account for potential sulfur contamination in the journey from refinery to the retail pump.

"I have not heard a lot of problems with pipelines," Marcogliese said.

He said Valero had planned for facilities that provide "good segregation" between batches of different types of fuel in order to reliably ship the ultra-low sulfur diesel.

"We have not heard of any major pipelines having bad batches," Marcogliese said.

U.S. ultra-low sulfur diesel inventories were at 42.5 million barrels in the week to September 1, according to a weekly report from the U.S. Energy Information Administration, the statistical arm of the Department of Energy. That was up from 5.9 million in the week to May 26, according to EIA data.

U.S. cash product traders and futures brokers have said that recent weakness in the differential between the wholesale price and benchmark futures has been because few anticipated transition problems have occurred.
New York Harbor ultra-low sulfur diesel was pegged at 6.25 cents over the front-month heating oil contract on the New York Mercantile Exchange on Thursday. Low sulfur diesel was only 2 cents over.
A month ago, ultra-low sulfur diesel was fetching 24 cents over the NYMEX heating oil contract and low sulfur was getting 23 cents over.
The U.S. retail diesel price last week dropped 6 cents to $2.97 a gallon, the EIA said on Monday. While that was up 7 cents from the year-ago period, it was the first time in five weeks diesel had been below $3 a gallon.

[tokyopua]

Jim Cramer showcased VLO last night as a mistake he made because it fell so much since he recommended it at $63.  He said he thinks it could go down another 5 points before it goes back up.  So some of the drop today could be in part to the usual Cramer effect.

Cramer usually claims not to be a "chartist" but $48 does look to be a support zone (5 points lower than the close at $53.29 yesterday), though hopefully VLO recovers sooner than that.

[la-onda]

VLO has created a P&F Spread Triple_Bottom Alert:

Links:
http://stockcharts.com/def/servlet/SC.scan?s=TSA[t.t_eq_s]![t.e_eq_y]![as0,20,tv_gt_40000]![yi_eq_1]
http://stockcharts.com/gallery/?VLO

I couldn´t resist and I have bought a few VLO shares @ 51.85$; overbought IMO