Valero Energy Corporation NYSE: VLO

 

Entry Price: $51.81 Target Price : $66.91

Potential Return : 29.1%

Investment  Thesis  •  Safety  

–  Lowest  Debt/EBITDA  in  the  refiner  space  –  Target  Debt/Equity  of  20%-­‐30%  –  Commitment  to  capital  allocaGon    

•  Stock  buy  back,  dividend  increases,  accreGve  refinery  projects  with  IRR  of  >25%  

•  Cheap  –  Trading  at  a  historical  low  on  an  EV/EBITDA  basis  –  Trading  at  a  discount  to  our  Sum  of  the  Parts  ValuaGon    

•  Drivers  of  Growth  –  Refinery  Expansion  projects  with  high  25+  IRR%  –  Midstream  logisGc  growth  with  resource  conversion  acGviGes  –  Lower  Feedstock  Costs  

Drivers  of  Growth  •  Valero  is  expanding  its  Capacity  for  refining  the  Gulf  Coast  and  Mid-­‐

ConGnent  Regions  of  the  country  where  they  experience  the  highest  margins  

•  New  projects  create  higher  volume  in  an  area  near  Port  Arthur  in  Texas,  that  gives  Valero  access  to  send  more  refined  products  broad,  enabling  them  to  demand  higher  margins  

•  Capacity  UGlizaGon  rate  remains  high  at  98%,  showing  strong  demand  for  refined  products  

•  Feedstock  Crude  Oil  Prices  should  remain  under  pressure  unGl  global  producGon  slows  or  economic  growth  accelerates  

•  Valero's  Partnership  with  the  MLP  Valero  Energy  Partners  should  provide  them  with  the  ability  to  transport  Crude  and  byproducts  easier  and  more  efficient  

Safety  

0  

100  

200  

300  

400  

500  

600  

700  

800  

900  

1000  

2015   2017   2019   2020   2026   2030   2032   2037   2039   2040   2097  

Principal  Repayments  

Segment  InformaGon  

($2.00)  

$0.00    

$2.00    

$4.00    

$6.00    

$8.00    

$10.00    

$12.00    

$14.00    

2009   2010   2011   2012   2013   2014  

Opera&ng  Income  Per  Barrel  

U.S.  Gulf  Coast   U.S.  Mid-­‐ConGnent   North  AtlanGc   U.S.  West  Coast  

(1,000)  

0    

1,000    

2,000    

3,000    

4,000    

5,000    

6,000    

7,000    

2009   2010   2011   2012   2013   2014  

OPERATING  INCOME  BY  REGION  

U.S.  Gulf  Coast   U.S.  Mid-­‐ConGnent   North  AtlanGc   U.S.  West  Coast  

U.S.  Gulf  Coast  Region  

53.0%  

52.0%  

50.0%  

53.0%  

46.0%  

44.0%  

2.0%  

2.0%  

2.0%  

0.0%  

11.0%  

11.0%  

10.0%  

14.0%  

20.0%  

23.0%  

13.0%  

16.0%  

19.0%  

13.0%  

17.0%  

14.0%  

8.0%  

6.0%  

6.0%  

5.0%  

4.0%  

6.0%  

14.0%  

13.0%  

13.0%  

13.0%  

13.0%  

13.0%  

0.0%   10.0%   20.0%   30.0%   40.0%   50.0%   60.0%   70.0%   80.0%   90.0%   100.0%  

2009  

2010  

2011  

2012  

2013  

2014  

U.S.  Gulf  Coast  Feedstock  Inputs  

         Sour  Crude  Oil            Acidic  Crude  Oil            Sweet  Crude  Oil            Residual  Fuel  Oil            Other  Feedstocks            Blendstocks  

Mid-­‐ConGnent  Region  

9.0%  

12.0%  

9.0%  

9.0%  

8.0%  

6.0%  

80.0%  

79.0%  

82.0%  

81.0%  

83.0%  

82.0%  

1.0%  

1.0%  

1.0%  

1.0%  

1.0%  

1.0%  

9.0%  

8.0%  

8.0%  

9.0%  

8.0%  

11.0%  

0.0%   10.0%   20.0%   30.0%   40.0%   50.0%   60.0%   70.0%   80.0%   90.0%   100.0%  

2009  

2010  

2011  

2012  

2013  

2014  

US.  Mid-­‐Con&nent  Feedstock  

         Sour  Crude  Oil            Sweet  Crude  Oil            Residual  Fuel  Oil            Other  Feedstocks            Blendstocks  

Capacity  Expansion  •  Increase  of  160  MBPD  capacity  

–  Houston  ($400M)  –  Increase  by  90  MBPD  

–  Corpus  ChrisG  ($350  M)  –  70  MBPD  

•  Mckee  Diesel  Recovery  Project  ($100  M)  –  Annual  EBITDA  ContribuGon  of  $100  M  

•  At  average  2014  feedstock  prices  these  projects  should  increase  EBITDA  by  $600  M  per  year    

Resource  Conversion  •  Spinoff  of  CST  Brands  (NYSE:  

CST)  –  Have  contracts  that  maintain  

near  exclusive  distribuGon  rights    

–  Spinoff  unlocked  shareholder  wealth  

–  Valero  recently  sold  out  of  remaining  stake,  that  neled  the  company  $1  billion  amer  tax  profit  

•  Valero  Energy  Partners  (NYSE:  VLP)  –  Midstream  gives  them  the  

ability  to  increase  volume  and  logisGcal  efficiency  

–  Plans  to  have  a  logisGcs  dropdown  of  $1  billion  in  2015  that  will  provide  them  with  ease  to  transport  oil    

–  VLO  acts  as  the  GP  of  VLP  and  has  in  their  contract  that  as  VLP  distributable  earnings  grow  they  are  enGtled  to  a  larger  percentage  

Valero  Energy  CorporaGon  and  MLP  

MLP  Profit  DistribuGon  

2015  Target  

2016  Target  

$0.002    

$0.076    

$0.105    

$0.126    

$0.000    

$0.020    

$0.040    

$0.060    

$0.080    

$0.100    

$0.120    

$0.140    

2013   2014   2015  E   2016  E  

Cash  DistribuGons  to  Valero  on  a  per  share  basis  

Wealth  CreaGon  

 $  -­‐      

 $10.0    

 $20.0    

 $30.0    

 $40.0    

 $50.0    

 $60.0    

2009   2010   2011   2012   2013   2014  

Book  Value  Per  share  

CAGR  :    11.5%  

Capital  AllocaGon  

•  Capital  spending  aimed  at  increasing  advantage  Crude  Processing  

•  LogisGc  spending  seeks  to  increase  transportaGon  through  pipelines  

170  45   5  

220  

180  

665  

510  

175  

45  

$0  

$250  

$500  

$750  

$1,000  

2014   2015  E   2016  E  

Capital  for  LogisGcs  

Marines,  Docks,  Other  LogisGcs   Pipelines  and  Tanks   Railcars  and  Unloading  

45   40   115  120   150  105  

180   110   30  

345   490  

50  

$0  

$250  

$500  

$750  

$1,000  

2014   2015  E   2016  E  

Capital  for  Key  Trends  

Natural  Gas  and  Petrochem   Other  Products   Hyrdofracking   Advantaged  Crude  Processing  

Public  Comparable  Analysis  

LTM EV/EBITDATangible Book

Value Per SharePrice/ Tangible

Book ValueLTM EBITDA

Margin % Debt/EBITDAHolly Frontier 9.6x $16.23 2.5x 4.4% 1.2xTesoro 8.0x $24.33 3.7x 5.2% 2.0xPhillips 66 6.6x $31.88 2.4x 3.0% 2.0xValero 4.5x $40.20 1.5x 5.8% 0.8x

Average 7.2x $28.16 2.5x 4.6% 1.5xMedian 7.3x $28.11 2.5x 4.8% 1.6x

Adjusted  Comps.  Current  Share  

PriceValue  with  0%  EBITDA  Growth

Discount  /  (Premium)

Expected  Growth

Current  Market  EV/EBITDA

Leverage  Adjusted  EV/EBITDA

HollyFrontier $40.04 $35.10 -­‐12.3% 27.8% 9.58x 9.16xPhillps  66 $76.29 $44.31 -­‐41.9% 19.0% 6.47x 6.08xTesero $87.81 $59.13 -­‐32.7% 9.0% 7.43x 6.73xValero  (minus  MLP) $59.66 $61.54 3.2% -­‐0.4% 4.54x 4.24x

9.16x  

6.08x   6.73x  

4.24x  

0.00x  

1.50x  

3.00x  

4.50x  

6.00x  

7.50x  

9.00x  

HollyFronGer   Phillps  66   Tesero   Valero  (minus  MLP)  

Leverage  Adj.  EV/EBITDA  

ValuaGon  EV/  EBITDA  

2014  EV/EBITDA   4.4x  

Historical  EV/EBITDA  MulGple   4.7x  

2015  EBITDA   $8.19  B  

Fair  Value   $69.63  

Sum  of  the  Parts  (No  Growth)  

Fair  Value  of  VLO  Standalone  

$62.37  

Fair  Value  of  VLP   $14.31  

VLO  %  Ownership  of  VLO  

70.6%  

Value  of  VLP  Alributable  to  Valero  in  Terms  of  Valero  Stock  

$4.13  

Fair  Value   $66.50