Valero Energy Corp. (VLO) is one of the largest independent petroleum refiners in the U.S. Valero owns a combined 15 petroleum refineries in the U.S., Canada, and the U.K. with an overall capacity
of about 3.1 million barrels a day. With the anticipated post pandemic travel boom around the corner, the demand for refined crude oil is rising. This is evident when we look at the price of West Texas Intermediate (WTI) crude oil, which is trading at about $62 per barrel. Just last year, in April 2020, WTI had turned negative. Needless to say, with WTI trading in $60 range, oil and gas companies will get back in the black. This week, I fundamentally analyze Valero’s stock. I review VLO’s operating segments, look at its key ratios, derive the intrinsic value using Discounted Cash Flow (DCF) analysis, and calculate the expected rate of return from this investment. Since this is a long video, please feel free to use the time stamps in the video if you only wish to watch certain topics.
I review various key ratios such as Revenue, Net Income, Shares outstanding, Dividends, Payout Ratio, Free Cash Flows (FCF), Financial Leverage, Current Ratio, Debt to Equity Ratio, Return on Equity (ROE), Days Sales Outstanding (DSO), Days Inventory, Payable Period, Cash Conversion Cycle, Inventory Turnover, etc.
After taking into account 2019’s free cash flow of $3,537 million figure, a 5% growth rate of FCF (growth for the next 10 years), 11.5% discount rate, 3% long term growth rate (growth from 10 year mark to perpetuity), 407 million shares outstanding, and $13,954 million of long term debt, the DCF analysis yields us an intrinsic value of $83.49 per share. Using the current stock price of about $77 per share, and taking into the shares outstanding and future projects of free cash flows, we get the annual expected rate of return to be 12.1% if we hold this security through 2040.
Timestamp
0:00 Introduction
0:35 Operating Segments
2:44 Key Ratios Analysis
14:34 Discounted Cash Flow Analysis / Intrinsic Value
16:32 Expected Rate of Return Calculation
17:43 Summary / Conclusion
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References:
Valero’s Website: here
Morningstar Key Ratios Link: here.
Useful Resources here.
Valero Energy Corporation is a Fortune 500 international manufacturer and marketer of transportation fuels, other petrochemical products, and power. It is headquartered in San Antonio, Texas, United States.
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