David ParkRyan Ranson

“Valero Energy Corporation appears to be an attractive investment opportunity based on its low valuation and its dominant position in the refining and marketing industry. Valero’s size and expertise in refining allow it to have the lowest operating cost per barrel, giving the company a significant advantage over other refiners. The company’s ability to refine cheaper feedstocks also helps to increase refining margins and thus profitability. Although the industry is expected to experience slow growth in the future, Valero’s strong fundamentals will allow it to return capital to investors through dividend growth and stock buybacks. In addition, any reversion to historical relative valuation measures will provide investors with superior capital gains. “

Drivers of profitability Refining margins Per barrel cost reduction Refining capacities

Porter’s 5 forces Threat of entry: Low Power of suppliers: Medium Power of buyers: Low Threat of substitutes: Medium-High Competitive rivalry: Low-Medium

What makes Valero different? Lowest operating expense per barrel

What makes Valero different? Capability of refining cheaper feedstocks

Economic engine Profit per barrel refined

Value proposition Refining at a lower cost

Current operating environment Goodwill writedown in 4th quarter 2008▪ Net income adjustment in analysis

Issued debt in 1st quarter 2009 Reducing capital expenditures for 2009 Agreement to buy 5 ethanol plants

Volatile refining margins Addressed in sensitivity analysis

Government/environmental regulations

Supply of crude oilRefinery interruptions Integrated oil & gas competitorsContinued economic downturn

Pressure on margins

Projected Margin Per Barrel VLO Share Price8.00$ (18.00)$ 9.00$ (4.28)$

10.00$ 9.44$ 11.00$ 23.16$ 12.00$ 36.88$ 13.00$ 50.60$ 14.00$ 64.32$ 15.00$ 78.05$

Cost of Equity VLO Share Price7.0% 74.24$ 8.0% 59.67$ 9.0% 49.94$

10.0% 42.97$ 11.0% 37.73$ 12.0% 33.65$ 13.0% 30.37$ 14.0% 27.68$ 15.0% 25.43$ 16.0% 23.52$ 17.0% 21.88$ 18.0% 20.46$ 19.0% 19.20$ 20.0% 18.09$

Growth Rate VLO Share Price-2.0% 25.45$ -1.0% 26.59$ 0.0% 27.93$ 1.0% 29.50$ 2.0% 31.40$ 3.0% 33.71$ 4.0% 36.61$ 5.0% 40.33$ 6.0% 45.30$ 7.0% 52.26$ 8.0% 62.72$ 9.0% 80.20$

10.0% 115.30$

Refining margins Out of Valero’s control, but helped by

sour crudeOperating cost per barrel

Already a leader but current levels are high historically

Utilization rates/capacity Do not necessarily need to expand but

cutting capacity will reduce profitability