valero energy

Valero EnergyNYSE: VLO

Business Overview

● Operates 15 refineries and 11 ethanol plants

● 18% market share in refining, 7.2% gasoline and petroleum bulk stations

● Owns 70% interest in Valero Energy Partners, an MLP pipeline

Valero Energy Corp. is a Fortune 500 company that engages in the manufacture and market of transportation fuels, petrochemical products, and power. It operates through Refining and Ethanol segments with 7,400 distribution outlets

Key Information

● Founded: 1980

● Headquarters: San Antonio, Texas

● Employees: ~10,000

● Market Capitalization: $31.8B

● TTM EPS: $6.89

● Dividend Yield: 1.75%

Operations Overview● Refines crude oil into petroleum products of higher

value (gasoline, diesel and jet fuel, asphalt, etc.)

● Utilizes low-quality feedstock to produce high-quality refined producto Capitalizes on cost-advantaged crude,

typically trading at discounts

● Weighted average complexity score: 12.5o Highest among all U.S. refineries

● Markets refined product to U.S. and other countries

Areas of Operation

Investment ThesisPure-play company with best-in-class margins, strategic locations, and highest industry asset complexity

● Complete vertical integration significantly lowers cost of business and lowers industry exposure

● Ability to capitalize on an unprecedented industry spread from recent price volatility

● Oversupply of Gulf Coast oil will drive refinery revenue growth

Management Team

Joseph W. Gorder, Chairman, President and CEO● Promoted to CEO in 2014● 27 years of experience at Valero● Has held several senior management positions

Michael S. Ciskowsi, CFO and Executive Vice President● 18 years of experience at Valero● 12 years as CFO● Proponent for the divestiture of higher-cost assets

Revenue BreakdownGeographic BreakdownProduct Breakdown

2014 Revenue

CAPEX Breakdown● Plan to sustain Capex spending at about $1.5 billion annually

● Crude Topper Investments: Increase capacities at Corpus Christi and Houston refineries by 70 MBPD and 90 MBPD respectively

○ Total investment of $750 million expected to yield $500 million in annual EBITDA contribution (50% unlevered IRR on total spend)

● Port Arthur and St. Charles Hydrocrackers significantly more profitable than expected○ Increased margin capture rate by 4%○ Added TTM EBITDA of $800 million

Crack Spread

The difference between cost of crude inputs and price of refined outputs:

● Directly translates to gross margin expansion

● Spread expected to continue at levels well above historical averages

● Crack Spread futures contracts in-line with thesis

Spread dynamics:○ Oversupply lowers crude prices○ Global demand increases refined

prices

Strategic refinery locations (Gulf Coast)

Highest-value assets (12.5% complexity)

Industry-leading profit margin as a result of low-cost feedstock hydrocrackers

Above-average asset utilization of 96%

Increasing payout ratio + buybacks

Generating higher FCF than peers

Competitive Advantages Catalysts

Strategic CAPEX deployment + divestitures

Seaway pipeline + TransCanada pipeline to increase Coastal volume

Highly profitable top-of-the-line investments

Canada-Latin America price war will further increase Gulf margins

Macro Drivers● Canadian/Latin American oil price war will

increase Gulf Coast volume, while reducing input prices.

● Valero comprises 53% of the Gulf Coast’s light and heavy refining capacity

● Bigger is better in refining: distribution networks, economies of scale, etc.

● Export Ban: Valero has highest export capacity among its peers (500 mb/d)

U.S. Production Remains Steady Despite Rig Decreases

Risks

● Crack spread materialization

● Environmental regulation efforts

● Effects of lifting export ban will have mixed effects on refiners

● High earnings estimates○ Management historically sets conservative guidance

Historical Earnings Performance

Profitability & Capital Structure

Relative Valuation

Balance Sheet

Comparable Company Analysis

Free Cash Flow Analysis

Investment Recommendation: BUY1. Best positioned refinery in the U.S. to capitalize on volume and margin circumstances

developing on the Gulf Coasti. Low Debt/Equityii. Refinery Complexityiii. Export capacity

2. Numerous macro and company-specific catalystsi. Crack Spreadii. Global Oil Dynamicsiii. Gulf Coast play expected in coming years

3. Committed to disciplined capital allocation and returning cash to shareholdersi. 2015 company goal to exceed 2014’s payout ratioii. 10-yr average annual dividend growth: 21.9%iii. Planned $1.5 billion in 2015 CAPEX

Q&A