According to the Finviz.com website, there are 29 companies in the oil and gas refining industry. Valero Energy Corporation (NYSE:VLO) is the second largest. It is the third cheapest by current P/E and fourth cheapest by future P/E. Not only is the company cheap from a value perspective, it is trading near the bottom of its one-year range:
Everything Looked Good in the 2015 Annual Report
The balance indicates the company is conservatively managed. Over the last five years, Valero increased its current ratio from 1.54 to 2.03 and its quick ratio from .78 to 1.2. Accounts receivable decreased from $8.7 billion in 2011 to $4 billion in 2015, which decreased AR from 20% of assets to 10%. This indicates the company is not extending credit to bolster sales — a very prudent development in the current low oil price market. Inventory as a percentage of assets fluctuated between 13% and 14%, indicating the company is handling the slowdown well. Total cash increased from $1 billion to $4 billion over the last five years.
The company’s cash flow statement is also impressive. Since 2011, cash from operations has fluctuated between $4 billion and $5.6 billion. This is more than adequate to cover VLO’s net investments in property, which have varied between $1.4 billion and $2.9 billion over the same period. The difference between the two has left adequate capital for a stock buyback and dividend payment program (see below).
While revenue dropped 33% in 2015, COGS dropped 37%, leading to an increase in net income. This was reflected in Valero’s cash flow statement.
Q1 2016 10-Q: Earnings Miss Creates a Buying Catalyst
Unlike the favorable revenue/cost effects in fiscal 2015, VLO had a bad first quarter. From the 10-Q:
In the first quarter of 2016, we reported net income attributable to Valero stockholders of $495 million, or $1.05 per share (assuming dilution), compared to $964 million, or $1.87 per share (assuming dilution), in the first quarter of 2015. The $946 million decrease in refining segment operating income in the first quarter of 2016 compared to the first quarter of 2015 was due primarily to lower margins on refined products and lower discounts on light sweet and sour crude oils relative to Brent crude oil, partially offset by higher margins on other refined products (e.g., petroleum coke, propane, and sulfur). Our ethanol segment operating income decreased $3 million in the first quarter of 2016 compared to the first quarter of 2015 due primarily to lower ethanol margins that resulted from lower ethanol prices.
These poor results create a buying opportunity. And the future looks brighter than implied by the latest quarterly results. Crack spreads are increasing, meaning the company should see an uptick in revenue and profit. Increasing oil prices should increase VLO’s sales amount. Finally, the summer driving season should mean an increase in overall demand.
Best of all, the company has a buyback plan and a high dividend. Over the last year, the company authorized a $2.5 billion buyback plan, of which $1.3 billion is outstanding. It is paying a healthy 4.31% dividend that has a very small payout ratio of 26%. Both the buyback plan and high dividend should put a floor underneath the stock.
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