EUR 850.00 For Business Accounts Only

Morningstar | Valero Reports Blowout 4Q; Shares Undervalued

Valero’s fourth-quarter results far exceeded our and consensus expectations, with adjusted net income of $900 million compared with $509 million last year. The better-than-expected performance was driven by wider discounts for North American light crude and certain sour crudes, which resulted in strong margin capture and improved refining operating income to $1.5 billion compared with $971 million a year ago. Management credited logistics investments it made in the last few years that have increased the availability of discount light crude to its U.S. and Canadian refineries as well as the flexibility of its refineries in processing cost-advantaged crude grades. Ethanol operating income fell to $27 million from $37 million on weaker margins, while VLP operating income rose slightly to $88 million from $80 million.

During the quarter, Valero paid out $965 million in repurchases and dividends, bringing its full-year total to $3.1 billion, or 54% of adjusted operating cash, exceeding its 40%-50% target. We expect similar activity in 2019 as it maintains those targets. It also increased its quarterly dividend by 12.5% in the first quarter, leaving shares yielding nearly 4.5%.

Our fair value estimate and narrow moat rating are unchanged, leaving Valero trading at an attractive level. Shares have fallen as swollen gasoline inventories have weakened margins, additional takeaway capacity has narrowed light crude discounts, and concerns over Venezuela supply have narrowed heavy spreads. As such, the first quarter will likely be relatively weak, but it typically is, meanwhile the outlook remains strong with a healthy economy and the coming implementation of IMO 2020, which is likely to bolster diesel demand and margins. Furthermore, we continue to like Valero’s competitive position given its high-quality asset base and its clear shareholder return policy.