Valero: Now Is The Time To Buy This Energy Giant
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Valero Energy Corp. (NYSE: VLO) shares are cheap. The company is currently the premier oil refiner in the United States and owns the largest and most profitable system of refineries in North America. Valero’s refineries are capable of processing crude oil that its competitors are unable to, which gives it the distinct advantage of being able to create higher margins by processing low cost crude into a product that competes with that of companies using higher grade crude. Valero has an output of over 3 million barrels each day and processes 1.1 billion barrels of ethanol per year, in addition to its crude operations. Why have so few people made a move on this company when it remains profitable each year?
Most refineries are only capable of processing high grade light crude oil and the ability to process heavy crude puts Valero in an advantageous position against its competition by allowing the company to purchase cheaper crude. Valero’s ability to process the much heavier crude oil found in areas such as Texas, where the company is based, gives the company much higher margins due to its ability to process these types of oil without any additional cost.
Valero competes with Reliance and the Indian Oil Corporation, which are two global giants in the market. Both competitors produce their own crude and have stakes in other markets such as in natural gas and the exploration of new oil sources. Due to the scale of its competitors, Valero often stands in the shadow of both companies on paper despite its $82.2 billion in revenues in 2010, which makes the stock go unnoticed when investors research energy stocks at a glance.
Valero Energy Corporation stock has consistently remained between $20 and $30 per share over the past three years despite back to back losing years in 2008 and 2009. Its turnaround in 2010 to come back from a $2 billion loss into profitability followed by $1.2 billion in profits in the first three quarters of 2011 has set the tempo for both this company and its stock. Currently Valero stock has not caught up with the progress the company has made and outside influences are more likely to put the company under the spotlight rather than its financials.
Royal Dutch Shell (NYSE: RDS-B) is currently eyeing Valero in a developing takeover war between Royal Dutch Shell (RDS.B) and Reliance. Rumor has it that Reliance is positioning itself to make an offer of $48 per share for the company but that other energy companies soon joined the bidding war. China’s CNOOC (NYSE: CEO) may get involved in the war as well if Valero comes under fire from Reliance.
Reliance is looking Valero’s way due to the need to expand beyond India. Valero operates 15 refineries and 1,000 retail fuel outlets with an influence in the United States, the United Kingdom, Canada and Aruba. The acquisition of Valero would diversify Reliance’s position against other giants such as Royal Dutch Shell (NYSE: RDS-A) and China’s CNOOC. Valero’s ability to process heavier crude, however, makes it an asset that is too valuable for Reliance’s competitors to allow it to acquire.
This potential bidding war will only fair well for the Valero stockholder. Whether the company is sold or not, it has shown an upward trend in revenues and profitability over the last three years, which makes the stock undervalued at its current price. A bidding war over the company will only increase the stock value as investors fight to get in on a piece of the action once the word is out.
I would definitely take a position in Valero, as I do not see much risk in the decision. The past three years have proven to be consistent, if nothing else, and the company is beginning to show signs of real growth. These factors make Valero a juicy meal for many of the sharks in the market who are hungry for a stronger foothold in North America and the United Kingdom or who want to diversify beyond their current position in the global market.
Even if Valero isn’t sold in 2012, I see this year as a year of growth for the company and the attention that it receives from the coming media blitz will increase its attractiveness among investors. Many will buy into the stock simply on the chance that Valero is bought, which will undoubtedly mark a payday for anyone who has jumped on the opportunity to get in before the hammer falls. I wouldn’t ride out a decision on this one because the conditions on the field can change at the blink of an eye and this opportunity could be gone in a month, a week, or even a day if news breaks of Valero’s sale to a larger competitor.
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