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Krause Fund Research
Fall 2015
Energy Recommendation: HOLD
Analysts
Kramer Halverson
[email protected]
Blake Galley
[email protected]
Michael Schremp
[email protected]
Austin Svatos
[email protected]
Company Overview Valero Energy Corporation is an Oil & Gas Refining &
Marketing company headquartered in San Antonio, Texas.
Valero was incorporated in 1981 and trades publicly on the
New York Stock Exchange. Valero owns and operates 15
refineries located in The United States, Canada, and The
United Kingdom. Valero’s throughput capacity of 2.9
million barrels a day makes them the largest independent
refiner in the U.S. These refineries produce a variety of
products including gas, diesel fuel, jet fuel, asphalt, and
petrochemicals. Valero caters to markets in The United
States, Canada, The Caribbean, and The United Kingdom.
As of January 31, 2015 Valero had 10,065 employees and
currently sits at #13 on the Fortune 500.1
Stock Performance Highlights 52 week High $72.70
52 week Low $43.45
Beta Value 1.45
Average Daily Volume 6.09 m
Share Highlights Market Capitalization $33.42 b
Shares Outstanding 481.50 m
Book Value per share $44.14
EPS (ttm) $9.51
P/E Ratio (ttm) 7.30
Dividend Yield 2.87%
Dividend Payout Ratio 21.39%
Company Performance Highlights ROA 9.98%
ROE 22.95%
Sales $130.8 b
Financial Ratios Current Ratio 2.03
Debt to Equity 31%
Valero Energy Corp. (NYSE: VLO)
November 15, 2015
Current Price $69.60
Target Price $84.22
VLO Thriving in Low Oil Price
Environment
Valero is trading at a very low valuation relative to its
industry.
Cheaper crude oil means cheaper input costs for
refineries. Gas prices have declined as well but not as much
as oil; so while revenue has declined profit margins have
increased.
While we expect oil prices to remain low throughout
2016, we believe they will rally back toward $100/barrel
starting in summer 2017. Depending on the rate of this
recovery, Valero could experience rapid rises in input cost
over a short period of time.
Support in The House to lift a 40 year old ban on US oil
exports that, if passed, would squeeze Valero’s margins
causing earnings to dwindle in the following years.
“Crack Spreads” continue to rise which indicates even
more profit for Valero’s refining segment this quarter and
into 2016.
Recent strong dividend growth expected to continue into
2016.
One Year Stock Performance
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Real Gross Domestic Product
Real Gross Domestic Product (GDP) is the most
popular metric for measuring the overall
wellbeing of an economy. GDP takes into account
the value of all the goods and services that are
produced within a given year. Recently, US GDP
growth has been strong, posting positive growth
for six straight quarters as demonstrated in the
chart below.
Source: whitehouse.gov
Despite a global economic slowdown headlined
by economic crises of China and Greece, the US
still continues to have healthy GDP growth. We
believe this will change in 2016 affirming that the
current state of the global economy will finally
begin to affect the US. Red flags close to home
such as NAFTA partner Canada’s recent recession
to the possible bailout for US territory Puerto
Rico signals that an economic slowdown may
come sooner than most think. We predict the US
to post negative GDP growth in either Q2 or Q3
of 2016 and expect lower GDP growth in Q1 and
Q4 of 2016 compared to the historical average of
3.24%.6
Oil Prices
The price of oil is the energy sector’s primary
influencer considering that the majority of
companies within this space are directly
dependent upon oil prices; either as a revenue
driver or an input cost.
Source: FRED Database
The Chart above validates oil price volatility
within the last five years (from its 2011 high of
$113.93/b to the recent low of $38.22/b). Since
the summer of 2014, oil has seen an alarming
decline of around 50% and currently sits at
$41.85/b. This dramatic falloff can be explained
by an oversupply of oil in the market due in large
part to the US shale boom propelling an
exponential increase in domestic oil production
which began in 2012.
Source: cfainstitute.org
Also as previously discussed, Economic woes in
China and the EU have thwarted demand and
contributed to the low oil price environment we
see today.2
As one can imagine, these low oil prices have
crippled the energy sector as a whole seeing a
Economic Outlook
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34% decline in the S&P 500 energy index in the
past year. Low oil prices hinder companies that
specialize in oil exploration and extraction as oil
prices reflect these companies revenue per barrel
drilled. In turn, these low oil prices provide an
opportunity for refiners who use crude oil as input
and therefore reduced oil prices lower these
companies’ cost of goods sold and increase their
gross margins.
We expect that oil prices will eventually make a
significant recovery sometime in 2017 due to
gradual global economic recovery, policy
changes, and OPEC continuing to decrease its oil
output. However, we believe that low oil prices
are here to stay for the foreseeable future with an
average price of $55/barrel in 2016.
Government Policy and Regulation
The US government has many regulatory policies
in place that energy companies need to abide by.
Most of the time the costs of these regulations are
not significant enough to be a factor in the overall
valuation of a company. However, a recent
development on the US oil export ban could have
massive implications for the energy sector.
In October, The House passed a vote that would
lift the 40 year old ban on US oil exports. The lift
However, President Obama is poised to veto the
proposition and thus likely insuring that the lift on
the ban will not happen during his presidency.
The ban is a hot button issue with much debate.
The popular opinion is that lifting the ban will
increase jobs and GDP in the long run, but the
greatest impact will be felt in the oil markets.4
We believe that lifting the ban will cause US oil
prices to rise due to the decrease in the domestic
oil supply while in turn lowering global oil prices
due to the flood of oil from new US exports. This
means that both US and global oil prices will
converge to the point where they will equal one
another. The biggest winners will be the US
drilling companies as they will be able to sell their
crude oil at a higher price.
Source: nasdaq.com
Unfortunately, the biggest losers will be the US
refineries like Valero. By lifting the ban, higher
oil prices will mean a higher cost of goods sold
and substantially lower margins as shown by the
chart above.
While it is true that we do not believe that this
will happen during Obama’s presidency, we do
believe a lift on the oil export ban is likely to
come in 2017 especially if a republican candidate
is elected president. This is a warning sign for
Valero that investors should worry about if our
predictions are realized down the road.
Interest Rates
In December of this year, the Fed is expected to
raise the federal funds rate by 0.25%.
Source: Market Realist
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When the Fed raises rates, interest rates usually
rise as well. When interest rates rise, so does the
strength the dollar to other countries with lower
interest rates. The chart on the previous page
displays a negative correlation between dollar
strength and oil prices. Since the value of oil is
expressed in US dollars, an increase in the value
of the dollar will signal a decrease in oil prices.5
By expecting interest rates to rise in December,
we also expect oil price to decrease further,
predicting a price below $40/barrel during
December and January.
Capital Markets Outlook
Based on our economic analysis, we expect that
the energy sector will continue to underperform.
Although, in the long term outlook 3-5 years
down the road, we believe the energy sector will
recover and once again become a strong
performer within the S&P. We believe the stock
market as a whole will continue to slowly decline
in 2016 based on the chart below.
Source: Y Charts
As you can see, the value of the S&P 500 loosely
follows the trend of US GDP. So since we
predicted that GDP growth would slow in the
coming year below the average of 3.24%, then we
also assume that the stock market will
underperform as well. We predict the S&P 500
will average around 1,975 points in 2016 which is
3.7% below 2015’s current average value of
2,051.6 points.
Industry Overview
Valero operates within the industry Oil, Gas, &
Consumable Fuels. The industry itself is largely
led by two sub-industries: integrated oil and gas,
and oil & gas exploration & production. As
explained in greater detail below, the sub industry
oil & gas exploration & production can further be
defined by placing those companies into three
distinct categories: Upstream, Midstream,
Downstream based on their operations.
Consolidation and vertical integration within
exploration/production and processing/refining
has allowed Exxon Mobil, Chevron, and Kinder
Morgan to acquire approximately 49% of the
entire industry’s market capitalization. Firms
within this industry must operate with razor thin
margins due to the highly positive correlation
between revenue streams and the market price of
crude oil and natural gas.
Defining the Industry
The Oil, Gas, & Consumable Fuels industry is
composed of three large segments:
1. Exploration & Production,
2. Transportation & Delivery
3. Refining & Marketing.
These three segments make up what is often
referred to as the integrated process.7 Integrated
oil companies (i.e. Exxon and Chevron) specialize
in all three of these facets. and are hard to
categorize into only one of these criteria. This
industry as a whole is difficult to measure since it
possesses many companies that operate very
differently from one another and are thus helped
or hindered differently due to changes in oil
prices. To solve this problem, we can place
companies into three categories that will paint a
better picture as to how these companies are
performing relative to other companies that have
similar operations. The graphic on the next page
shows what these three categories are and how
each makes their money in different ways.
Industry Outlook
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Source: Quora
Upstream: Firms that actively engage in the search
and exploration of oil and natural gas occupy this
segment of the integrated process. Once found, these
firms sell the raw hydrocarbons on the open market to
firms involved in commercial transportation, storage,
and processing. The upstream has the potential to be
the most profitable activity within the integrated
process, however it proves to bear the most risk due
to the capital intensity of this segment. Revenue stem
solely from the access and discovery of oil deposits.7
Midstream: As stated above, midstream firms are
involved in the second stage of the integrated process.
Transportation of hydrocarbons around the world can
take place in the form of pipelines, tanker ships, rail,
and sometimes tanker trucking.7 Transportation firms
operate by moving their supply of hydrocarbons to
those who store (for own reserves or trading
purposes) hydrocarbons, or firms that operate in the
downstream. Revenue streams in this segment are
highly dependent on the global supply and demand of
hydrocarbons themselves.
Downstream: Valero is classified as Downstream Oil
Company and acts as the final stage of the integrated
process. The downstream process takes place once the
hydrocarbons are transported and sold to refiners and
marketers. Refiners then transform raw hydrocarbons
into usable petrochemical products.
Source: S&P Net Advantage
Each barrel of crude oil is broken down and separated
into gasoline, diesel, jet fuel, heavy fuel oil, and
liquefied petroleum gas. Marketers then sell these
transformed products to the ultimate consumer.7
Recent Developments and Trends
Price Uncertainty and Instability
Brought on by the October 2014 cut in Saudi Arabia’s
official selling price, crude oil prices have
experienced dramatic downside volatility that has in
turn proved detrimental to U.S. shale oil producers.
As the market price for crude oil slipped further
toward the downside, upstream oil and natural gas
producers have found it increasingly difficult to
maintain steady day to day operations. As a result, the
large majority of upstream players have needed to
reduce or even cut rigs to maintain key profit margins
and limit their exposure to excessive capital
expenditure.8 Going forward, it will be increasingly
important to take note of the capital structure
embedded within these firm’s debt and equity
contracts. As margins become thinner, these firms
must emphasize reducing their individual cost of
capital.
Increasing Debt and Devalued Reserves
As a result of falling oil prices, the first half of
2015 has not fared well for U.S. shale producers.
Reporting billions in cash outflows, shale producers
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have turned to selling equity, tangible assets, and
issuing billions in public debt all in attempts to
increase production and reserves.9 Effective October
1st, many U.S. shale firms will be subject to the
redetermination of their borrowing base. The bank's
determination of how much capital they are willing to
lend to their oil and gas clients could prove to be
detrimental to many upstream oil and natural gas
firms. By devaluing the reserves in which they sit,
small to midsize producers may encounter even
higher levels of cash outflows and debt levels, which
could lead to further slowing of production.7
Integrated Revenue Drivers
Despite suffering heavy losses, integrated oil &
natural gas firms have been able to mitigate some of
their upstream exposure from declining oil prices
through midstream and downstream operations. As oil
prices fell and production ramped up, these firms
have greatly benefited from the swell in oil and
natural gas supplies as well as cheap input prices.
As U.S. onshore oil production surged, midstream
firms quickly became shocked with demand to move
the new crude oil to refineries. In efforts to keep up
with demand, storage and transportation companies
scrambled to increase their capacity by building and
expanding upon pipelines, storage terminals, and
processing facilities.10 S&P Capital IQ reported
saying, “Overall, total US fractionation
capacity is expected to rise by 30% to 5.8
million barrels per day by year-end 2016”.
Likewise, downstream oil processors and
refiners have experienced a dramatic fall in
input prices. As prices fell and a greater
supply came onto the domestic market,
refineries have been able to purchase crude
oil at substantially lower prices. By
reducing much of their variable cost and maintaining
a steady refining margin, these firms have been able
to increase profit despite posting lower revenue and
because of this have tended to fair the best given the
current state of oil prices.
Industry Competition
The three biggest players in the Oil, Gas, &
Consumable Fuels Industry make up 48.6% of the
industry’s market cap. The two biggest companies
being Exxon Mobil and Chevron, are integrated oil
companies in which they operate over all three facets
of the industry (i.e. Upstream, Midstream,
Downstream). These two companies dominate almost
every process especially in upstream and downstream
production. Exxon Mobil and Chevron are each
other's biggest competitors facing very little direct
competition from other companies with the exception
of a small few.
That is not to say there are not smaller companies
within the industry that are still competitive, but the
larger companies do hold a considerable amount of
power over them. Price is the most powerful force
driving competition due to the fact that no matter
which supplier a consumer chooses, all of their
products are very similar; that is there is very little
difference between the crude oil and petroleum
products from one company to another besides the
price tag. This is why industry margins are so thin
because one of the only ways a company can
differentiate itself is to offer a lower price than
competitors.
Source: Morningstar
We took the top three companies based on market cap
in each segment and compared each of them across
three ratios to see if there were any difference across
each process. Upstream and Downstream seemed to
have similar ratio values. Their debt/asset ratios are
all relatively low which is not surprising considering
their revenue streams and margins are highly volatile
due to fluctuating oil prices and debt needs to be kept
low because the uncertain ability to pay back large
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amounts of debt when oil prices work against their
favor. With the eception of Anadarko, Price/Cashflow
and EV/EBITDA ratios for Upstream and
Downstream were also similar. These valuation ratios
tended to be lower in part because of these
companies’ debt structure but also because of
overreaction in the stock market. Historically, when
oil prices drop, Upstream and Downstream oil
company valuation ratios tend to also drop because of
investors selling their oil stocks. Low numbers for
these valuation ratios tend to be viewed as positive as
they can indicate that a stock maybe undervalued.
This is especially true in the Downstream where low
oil prices can often be a very good thing and may just
be mispriced based on the pessimistic attitudes toward
the oil industry as a whole.
The ratios for Midstream oil companies seem to
suggest that they operate very differently than
Upstream and Downstream companies. Debt/Asset
ratio is significantly higher in the Midstream. This
can be explained by the theory that Midstream
companies are not as sensitive to changes in oil prices
and therefore are less worried about volatility within
their margins when compared to their counterparts.
Pipelines are usually fee based and are only worried
about the volume of oil that passes through their
pipelines rather than the price. While not always the
case, hypothetically oil prices should not affect the
way a Midstream company operates.
Business Products and Strategy
Provided by: valero.com
Refining
Valero’s two reportable business segments are
refining and ethanol. Valero owns and operates 15
refineries located in The United States, Canada, and
The United Kingdom. The refining segment includes
refining operations, wholesale marketing, product
supply and distribution, and transportation operations.
Valero’s refineries have a combined throughput
capacity of 2.9 million barrels a day. The refined
products are then sold wholesale through an extensive
rack marketing network. These purchasers are usually
wholesalers, distributors, retailers, and truck-
delivered end users throughout the U.S., Canada, the
U.K., and Ireland.1
Ethanol
On the ethanol side, sales come from ethanol and
distillers grains that are internally produced. Valero
owns 11 ethanol plants throughout the Midwest with
a production capacity of 1.3 billion gallons per year.
After production, ethanol is stored on site before
being transported to customers by truck and rail.
Ethanol is sold to large customers who are primarily
refiners and gasoline blenders. A bi product of
ethanol is dry distillers grains (DDG). These DDGs
are sold to animal feed customers throughout the U.S.
and are shipped by truck and rail. DDGs are also sold
on site at Valero’s 11 ethanol facilities.1
Specialty Products
In addition to Valero producing fuels such as gasoline
and diesel in their refineries, “specialty products” are
also produced and included in Valero’s refining
segment. These specialty products are produced at
specific refineries and are used to better diversify the
company into other sectors such as manufacturing and
agriculture. Asphalt, sulfur, and petrochemicals are
the three biggest specialty products that are sold by
the refineries. Asphalt is sold to construction
companies for use in road work and repair. Valero is a
large producer of sulfur which is marketed and sold to
customers in the agricultural sector who manufacture
fertilizer. Finally, petrochemicals are produced and
sold to chemical manufactures which further process
these petrochemicals into products such as paints,
adhesives, and plastics.1
Company Analysis
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Financial Analysis of Recent Earnings
Operating Income by Segment
Valero’s refining operating income for 2014 was $5.9
billion which was a $1.7 billion from 2013’s tally of
$4.2 billion. This increase is due to an over-supply in
the U.S. oil market which have driven down WTI
crude oil price per barrel over the past year and a
half.1 This event created a wider gap between the
WTI and Brent Crude Oil indexes which increased
margins for refiners. US refiners buy crude oil based
on the price set by WTI. After refining the oil into
gasoline, the refiners then sell their gas based on the
Brent crude oil benchmark.11
Source: YCharts
It is true that Brent crude oil and gasoline prices have
also decreased over the last year. However, their
decline has been substantially less than WTI crude
oil. This gap between WTI crude oil prices and gas
prices creates the refining throughput margin or
“crack spread” which is the profit margin that a
refiner can expect to make after they refine a barrel of
crude oil into gasoline.13 Valero’s “Crack Spread” for
Q2 2015 was 13.71 which is a 48.1% increase from
Q2 2014. So in essence, Valero was able to take
advantage of high “crack spread” by buying cheap
from their suppliers and selling high to their
customers which led to increased profit margins for
the refining segment. This trend has continued into
2015. Through two quarters of 2015, the refining
segment’s operating income is $3.8 billion which is
58.3% year over year increase.12
Valero’s ethanol segment posted an operating income
of $786M which was up $295 million from 2013’s
$491 million. This increase was due to lower corn
prices and higher production volumes. These
positives were partially offset by lower ethanol prices
due to oil becoming more attractive option because of
its newly lowered price.1 Halfway through 2015 the
effects of cheap oil has continued to take a toll on
Valero’s ethanol segment. Operating income for
ethanol after 2 quarters was $120 million which is an
alarming decrease of 72.1% year over year. 12
We expect oil prices to remain relatively cheap
throughout the next 12 months and believe that
Valero’s refining segment will continue to thrive
because of a continued increase in the “crack spread.”
We believe Valero’s ethanol segment will start to
struggle and operating income will continue to
decrease until oil prices begin to recover. Overall,
Valero’s gains in the refining segment will overcome
ethanol losses to continue overall growth in operating
income.
EPS
Data rovided by: Yahoo! Finance VLO Analyst Estimates
Over the last four quarters, Valero has continued to
beat market expectations by a wide margin. Over the
last four earnings releases, Valero has beaten EPS
expectations by an average of 21.5%.12 We believe
that the success of Valero’s refining segment is the
cause for these recent beats. Better refining
throughput margin has caused Valero’s refining
segment to see strong year over year growth.1 Due to
the recent decline in oil prices over the past 2 years,
Valero has also benefitted from analyst’s low
expectations on earnings releases. These pessimistic
expectations have set a low bar on the company and
has allowed Valero to consistently surprise in their
earnings releases. We believe that Valero still has
good potential to continue to beat earnings estimates
but will not surprise by such large margins as seen in
the past year.
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Dividends and Buybacks
For the second time this year, Valero has increased
their quarterly dividend. Currently Valero is paying
out an annual dividend of $2.00 which is a yield of
2.87%.12 This new dividend was
announced after strong 2015 Q3 earnings
where Valero declared that they would
increase their quarterly dividend to $0.50
from $0.40. Previously in 2015, Valero
increased quarterly dividends by $0.125 to
$0.40 in January. In 2014, Valero paid out
$554 million of its $3.8 billion net income
in the form of dividends and seems
committed to improve upon that for 2015
and onward.13 That commitment seems to hold water
as the annual rate of dividend growth over the past
three years was 51.8%.13 We believe that Valero will
continue to disperse their profits to shareholders
through dividends. With profits expected to be higher
in 2015 than 2014 due to increased “crack spreads”,
our prediction is for dividend yields to increase for
2016.
Another way Valero returns cash back to its
shareholders is through stock buybacks. In 2014,
Valero repurchased $1.3 billion worth of shares.13
Over the past five years shares outstanding of Valero
have declined 13% for annual reduction of 2.6%. By
reducing the share count by 2.6%, annual EPS
increases 2.6%.14 We expect Valero to generate large
amounts of cash especially through the rest of 2015
and into 2016. If this happens Valero could use this
extra cash to continue buying back stock and
returning its earnings to stockholders at a possibly
increased rate.
Valuation Metrics
Source: Y Charts
Valero is valued very low right now compared to
the past few years. Valero’s trailing P/E is
currently 6.78. There have been times in the past 5
years where Valero traded at a P/E of 20 which is
over three times its current value.14 Source: Seeking Alpha
Not only is Valero valued historically low, it is also
carries a low valuation given its current margins.
Valero’s margins are comfortably higher than the
industry, sector, and S&P median. This may be a little
misleading because some Valero’s industry covers all
oil companies that operate in different facets of the oil
market and are thus affected differently by oil prices.
Valero being primarily a downstream oil company
will tend to do better than an upstream company when
oil prices are low like they currently are now. Never
the less, Valero still possesses good margins even
though they may seem a little inflated and it is
interesting to see that these margins do not
necessarily translate to a higher valuation. This may
suggest a misevaluation by the market and
opportunity to invest in an undervalued company and
realize a significant return.
Valero’s Price to free cash flow is also low at just 7.1.
This gives Valero a cash flow yield of 14% which
“theoretically could mean Valero could finance a
dividend yielding 14% through its free cashflow.”14
This information seems to reaffirm our position of a
possible increase in dividend yields in the near future.
Production and Distribution
Valero refines its products from crude oil. Crude oil is
rich in hydrocarbons and refiners break down or
“refine” these hydrocarbons into different products
such as diesel fuel and gasoline. To isolate the
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hydrocarbons, crude oil is heated in a still and the
various hydrocarbons are boiled off at different
temperatures. These hydrocarbons are retrieved
through a condensation process that transforms them
into specific products.15
After the refineries breakdown the crude oil into
refined products, they are shipped through a
pipeline to bulk storage terminals near large
consuming areas such as cities. The products are
then transported by tanker trucks to retail gas
stations.15 Valero owns many of these
transportation and logistical assets including
refined products pipelines, terminal tanks, and
tanker trucks.1 These assets are valuable as many
refiners share transportation and storage or have
to pay fees to a third party distributor. Valero also
owns 100% of the general partner interest in
Valero Energy Partners (VLP). VLP is a
midstream oil company that transports crude oil
from the oil fields directly to 5 of Valero’s
refineries.1 By owning these assets, Valero can
reduce logistical costs and charge other
companies fees to use their storage and pipeline
facilities under Valero Energy Partners.
Competition
Data provided by: Market Watch and Respective 10K’s
Valuation Comparison
We Chose 5 companies from our relative valuation
worksheet and compared them to Valero using
various metrics. We have found Valero is
undervalued compared to its top industry competitors.
Valero possesses the second lowest Enterprise
Multiple (EV/EBITDA). The Enterprise Multiple
helps us examine a company disregarding any
changes in capital structure and given the somewhat
similar debt to asset ratios seen above, we observe a
far lower Enterprise Multiple for Valero than the table
average (5.51). This suggests Valero is undervalued,
relative to its industry, regardless of the amount of
debt it has taken on (which still happens to be one of
the lowest peer percentages).
The low Price to Cash Flow ratio (P/CF) is another
indicator of Valero’s Comparative advantage. Having
a P/CF ratio that is nearly half of all the top
competitors in the Downstream market shows that
Valero’s cash flows are more efficient in supporting
the current trading price than its competitors. Valero’s
ability generate more efficient cash flows means it is
able to generate higher cash flow per share. This
provides Valero some protection to stock price
decline should its cash flows begin to dwindle.
Efficiency Comparison
A unique aspect in the oil industry is the high amount
of product that is produced and sold daily, giving very
high revenues compared to other industries. An oil
company’s efficiency crucial to their success. Valero
has emerged as the most efficient company in terms
of earning nearly thirteen million dollars in annual
revenue per employee, which is an astounding
number when compared to the other top downstream
producers. Having a high revenue/employee value
indicates that Valero is much more productive than its
competitors. This could also mean that since
Valero can generate competitive revenues with
less labor, they have a lower wage expense
which can lead to higher profit margins.
Valero is also the largest refiner in the industry
based on refining capacity. This is a huge
advantage in an industry with historically low
margins where volume becomes a key
component in the ability to produce significant profit.
Capital Structure
In terms of capital structure, Valero has the second
lowest Debt to Asset ratio of the top downstream
competitors. This gives Valero a much stronger
financial structure as this indicates Valero finances
less operations with debt than its industry peers,
giving it a lower risk factor. Given the large size of
Valero compared to the other top companies in the
industry, the ability to maintain a relatively low
leveraged company is very attractive investment to
stockholders. This also coincides with our findings
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above in terms of efficiency, having a more efficient
system with the assets in place allows Valero to take
on less debt to finance its operations giving it a nice
buffer against the risk associated with price and rate
changes in a notoriously volatile oil industry.
Revenue Decomposition
Valero’s two reported sources of revenue are through
its Refining and Ethanol segments. For refining, to
find revenue per refined barrel, we took the reported
volume of refined barrels produced per day and
converted it to barrels/year. Then, we took the
refining segment revenue and divided it by our
refined barrels/year. The process was the same for
ethanol except instead of barrels/day we were given
gallons/day. Readers may be confused as to why our
calculated revenue/gallon is larger than current gas
prices. This is because ethanol production is
subsidized by the government and these subsidies are
already built into our revenue/gallon making them
appear inflated when compared to normal gas prices.
Refining accounts for roughly 94% of the revenue,
with ethanol making up the other 6%. We forecast an
initial large drop off in Revenue in 2015 due to the
lower gas prices. Currently, Valero is not producing
at its refining capacity. We believe this will change
when we predict a lifting on the US oil export ban in
2017. The lifted ban will squeeze Valero’s margins
and force them to increase out to its capacity of 2.9
Million barrels/day. Valero is in the process in
expanding capacity in one of its Texas refineries that
will allow them to increase capacity by 100,000
barrels/day. The project is expected to be completed
in 2016. However, we will allow an extra year and
half to account for in setbacks in construction and
sufficient time to hire new employees to operate the
expansion. This will increase Valero’s capacity to 3.0
million barrels/day by 2019 at the latest.
DCF and Relative P/E Valuation
After forecasting our DCF and EP models we arrived
at a partial year adjusted stock price for both models
of $84.22, suggesting again that Valero is currently
undervalued. These models produce a potential upside
of 21% of the November 15 stock price, which
coincides fairly closely with our findings from the
DDM model and Relative P/E models. This is at the
top end of our range, but we believe that this model
gives us the most accurate representation of our
portfolio valuation because it is based on a variety of
company specific factors which is why we have
chosen to use it as our target price.
Relative P/E Ratio
We used a relative P/E ratio in order to get a better
idea of how Valero compares to similar firms in the
industry, comparing Valero to the following firms:
Phillips 66, Tesoro, HollyFrontier Corp, Western
Refining and Marathon Petroleum. We produced an
average forward P/E ratio of 9.0. After multiplying
this P/E by our 2015 EPS of 8.04, we found a relative
price of $72.72 and $77.88 for 2015 and 2016,
respectively.
This signals that Valero is more accurately valued
than we previously thought. While concerning, this
valuation should be taken with a grain of salt. As we
have explained earlier, oil companies tend to suffer
from abnormally lower P/E ratios when oil prices are
down and are historically low regardless of oil prices.
Because of this, oil companies are difficult to value
using a relative P/E method. However, this does help
reaffirm our hold rating even if the results may be
slightly skewed downward.
Dividend Discount Model
Our Dividend Discount Model estimated an intrinsic
value (after partial-year adjustment) of $81.72, which
gives us a 17.4% upside potential compared to the
closing stock price of $69.60 on 11/15/2015. This
model was difficult to estimate due to Valero’s recent
high percentage increases in its dividend. We tried to
be as conservative as possible with our dividend
growth rates. We grew our dividends by 15% in years
2017-2020 which may seem high, but is significantly
lower than Valero’s more recent dividend growth
rates. We settled on a CV dividend growth rate of 8%
which is a little higher than we would have liked, but
once again is more conservative when compared to
Valero’s past dividend growth. With that being said,
this valuation supports our DCF and Ep valuations.
Valuation Discussion
Page 12
12
Sensitivity Analysis
Beta Vs Current Value Growth (NOPLAT)
The risk of a firm and there continuing value of the
firms growth rates are crucial considerations when
establishing an investment recommendation, so
understanding the sensitivity of Valero’s stock
price to both was very important to us. As you can
see, all else held constant, a slight decrease in the
Beta of Valero, from 1.45 to 1.35 leads to a 6.85%
increase in the stock price, from $84.22 to $90.41.
This shows that Valero’s stock price is very
sensitive to the risk of the firm, which makes sense
as we have shown previously with the debt to asset
ratio, Valero has low risk relative to industry peers
which plays into our contention that it is
undervalued in the market. Conversely, with Beta
and all else held constant, a 1% increase in the CV
Growth rate of NOPLAT has a smaller effect on
the stock price, only increasing the stock price
0.98% up to $85.05.
Risk Free Rate Vs. Risk Premium
Given the volatility of interest rates in the market
today, we found it very important to consider the
effects of changes in the risk-free rates and risk
premiums used when evaluating our stock price.
This helped us to look more at long-term trends in
interest rates, for example we can see the large
effect of (all else held constant), a small variation
in either direction of the risk premium would cause
our price to fluctuate from $107.85 (a 21.91%
increase), with a 1.25% decrease; down to $69.61
(a 17.35% decrease), with a 1.25% increase. It is
plain to see that fluctuations in the risk premium
have a large effect on our stock price, which makes
sense as it is crucial in calculating the cost of
equity as well as the WACC for Valero.
Conversely, the risk free rate has a smaller effect,
but this is also due to the fact that we believe that
the Federal Reserve plans to keep the risk free rate
close to its current level, with a possible slight
increase over the next five years.
SG&A % of Revenue Vs Normal Cash % of
Revenue
We found SG&A as a percent of revenue was a
very integral in our valuation of Valero as a
whole, as Valero had few other Operating
Expenses, so changing SG&A in any direction
has a direct effect on many of our ratios
including the EV/EBITDA ratio discussed
previously. This is our reasoning for
conducting a very precise analysis, in terms of
very small incremental changes in SG&A as a
percent of revenue. For example, all else held
constant, a slight 0.2% decrease in SG&A
increases our stock price 4.98%, and a 0.2%
increase gives us a 5.25% decrease in our stock
price. The same holds true for normal cash, we
saw a significant change in stock price, with a
0.3% change in either direction, all else
constant.
Important Disclaimer
This report was created by students enrolled in the
Security Analysis (6F:112) class at the University
of Iowa. The report was originally created to offer
an internal investment recommendation for the
University of Iowa Krause Fund and its advisory
board. The report also provides potential
employers and other interested parties an example
of the students’ skills, knowledge and abilities.
Members of the Krause Fund are not registered
investment advisors, brokers or officially licensed
financial professionals. The investment advice
contained in this report does not represent an offer
or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and
figures included in this report are from publicly
available sources. This report is not a complete
compilation of data, and its accuracy is not
guaranteed. From time to time, the University of
Iowa, its faculty, staff, students, or the Krause
Fund may hold a financial interest in the
companies mentioned in this report.
Page 13
13
Sources
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2. Anderson, Richard. "Are low oil prices
here to stay?." BBC. N.p., 24 Feb. 2015.
Web. 14 Nov. 2015.
3. Reklaitis, Viktor. "Oil futures rise on
worries about supply disruptions." N.p.,
n.d. Web. 13 Nov. 2015.
<https://www.morningstar.com/news/mark
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futures-rise-on-worries-about-supply-
disruptions.html>.
4. "Lifting Crude oil Export Could Kill this
Industry." Nasdaq. N.p., n.d. Web. 15 Nov.
2015. <4.
http://www.nasdaq.com/article/lifting-the-
crude-export-ban-could-kill-this-industry-
cm470385>.
5. "How The Rising Dollar Is Causing Oil
Prices To Fall." Market Realist. Ed. Jeff
Rosenberg. N.p., 19 Dec. 2014. Web. 14
Nov. 2015. <5.
http://finance.yahoo.com/news/rising-
dollar-causing-oil-prices-
170656956.html>.
6. http://www.tradingeconomics.com/united-
states/gdp-growth
7. Azelton, Aaron M., and Andrew S. Teufel.
"Chapter 1." Fisher Investments on Energy.
1st ed. Hoboken, NJ: John Wiley & Sons,
2009. 3-17. Print.
8. Glickman, Stewart. "Oil, Gas &
Consumable Fuels." S&P Capital IQ Net
Advantage . N.p., June 2015. Web. 9 Sept.
2015.
<http://www.netadvantage.standardandpoo
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ode=ogp>
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2015.
<http://www.ft.com/cms/s/0/5a8c9a4c-
54b0-11e5-8642-
453585f2cfcd.html#axzz3lkxf7C7K>.
10. "Sub-Industry Review : Oil & Gas
Drilling." S&P Capital IQ Net Advantage .
N.p., June 2015. Web. 9 Sept. 2015.
<http://www.netadvantage.standardandpoo
rs.com/NASApp/NetAdvantage/showIndus
trySurvey.do?task=showIndustrySurvey&c
ode=ogp>.
11. VLO’s FactSet Research Report
12. "Valero (VLO)." Yahoo! Finance. N.p.,
n.d. Web. 16 Sept. 2015.
13. Goren, Arie. "Why Valero Energy Is Still
A Great Investment." Seeking Alpha. N.p.,
24 Feb. 2015. Web. 17 Sept. 2015.
<http://seekingalpha.com/article/2944086-
why-valero-energy-is-still-a-great-
investment>.
14. Weber, Jonathan. "Good Times Ahead for
Valero Energy." Seeking Alpha. N.p., 11
Sept. 2015. Web. 16 Sept. 2015.
<http://seekingalpha.com/article/3505916-
good-times-ahead-for-valero-
energy?li_source=LI&li_medium=liftignite
r-widget>.
15. "Where Does My Gasoline Come
From?." Louisiana DNR. N.p., n.d. Web.
21 Sept. 2015.
<http://dnr.louisiana.gov/index.cfm?md=pa
gebuilder&tmp=home&pid=244>.
Page 14
Valero Energy Corporation
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
Refining 122,925 129,064 126,004 84,423 88,644 95,985 101,744 114,554 127,355 131,813
YOY Growth(%) 12.63% 4.99% -2.37% -33.00% 5.00% 8.28% 6.00% 12.59% 11.17% 3.50%
Ethanol 4,317 5,114 4,840 5,045 4,793 4,319 3,866 4,239 4,712 4,948
YOY Growth(%) -16.17% 18.46% -5.36% 4.24% -5.00% -9.88% -10.49% 9.63% 11.17% 5.00%
Retail 12,008 3,896 -- -- -- -- -- -- -- --
YOY Growth(%) 2.64% -67.55% -100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total 139,250 138,074 130,844 89,468 93,437 100,305 105,611 118,793 132,067 136,760
YOY Growth(%) 10.53% -0.84% -5.24% -31.62% 4.44% 7.35% 5.29% 12.48% 11.17% 3.55%
Refining
Volume (Million Barrels/Day) 2.6 2.6 2.4 2.5 2.5 2.9 2.9 3.0 3.0 3.0
Volume (Million Barrels/Year) 949 949 876 909 929 949 949 1,008 1,088 1,088
Revenue Per Refined Barrel 129.53 136.00 143.84 92.87 95.42 101.14 107.21 113.64 117.05 121.15
Ethanol
Volume (Millions Gallons/Day) 3.0 3.3 3.4 3.8 3.8 3.3 3.3 3.0 3.4 3.4
Volume (Million Gallons/Year) 1,095 1,205 1,241 1,387 1,387 1,205 1,205 1,095 1,241 1,241
Revenue Per Gallon 3.94 4.25 3.90 3.64 3.46 3.59 3.21 3.87 3.80 3.99
Page 15
Valero Energy Corporation
Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
Sales 139,250 138,074 130,844 89,468 93,437 100,305 105,611 118,793 132,067 136,760
COGS excluding D&A 131,866 131,328 123,294 80,773 85,962 93,850 98,295 110,562 124,190 128,604
Depreciation 1,100 1,200 1,201 1,233 1,288 1,346 1,407 1,470 1,536 1,605
Amortization of Intangibles 474 520 489 326 340 365 384 432 481 498
Gross Income 5,810 5,026 5,860 7,136 5,847 4,744 5,524 6,328 5,860 6,053
SG&A Expense 698 728 724 483 505 542 570 641 713 739
Other Operating Expense 0 0 0 - - - - - - -
EBIT (Operating Income) 5,112 4,298 5,136 6,653 5,342 4,202 4,954 5,687 5,147 5,314
Nonoperating Income - Net 82 382 45 - - - - - - -
Interest Expense 313 365 397 364 381 384 389 386 376 373
Unusual Expense - Net 1,175 333 -768 - - - - - - -
Pretax Income 3,706 3,982 5,552 6,289 4,961 3,818 4,565 5,300 4,771 4,942
Income Taxes 1,626 1,254 1,777 2,201 1,736 1,336 1,598 1,855 1,670 1,730
Other After Tax Adjustments 0 -2 -554 - - - - - -
Consolidated Net Income 2,080 2,726 3,221 4,088 3,225 2,482 2,968 3,445 3,101 3,212
Minority Interest -3 8 81 - - - - - - -
Net Income 2,083 2,718 3,140 4,088 3,225 2,482 2,968 3,445 3,101 3,212
Preferred Dividends 0 0 0 - - - - - - -
Net Income available to Common 2,083 2,718 3,140 4,088 3,225 2,482 2,968 3,445 3,101 3,212
EPS (recurring) 5.23 5.39 4.91 8.04 6.41 4.95 5.93 6.90 6.24 6.48
Total Shares Outstanding 552.10 535.57 514.30 508.15 502.73 501.45 500.39 499.04 497.35 495.83
Dividends per Share 0.65 0.85 1.05 2.00 2.25 2.40 2.76 3.17 3.65 3.94
Payout Ratio 17.33% 17.10% 18.09% 24.86% 35.08% 48.49% 46.54% 45.97% 58.54% 60.85%
Page 16
Valero Energy Corporation
Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
Assets
Cash & Cash Equivalents 1,723 4,292 3,689 5,896 6,673 6,734 7,286 8,243 8,353 8,316
Short-Term Investments 8,336 8,823 5,976 6,107 6,242 6,379 6,519 6,663 6,810 6,959
Accounts Receivables, Net 8,087 8,699 5,509 4,643 4,875 5,279 5,596 6,300 7,005 7,250
Inventories 5,973 5,758 6,623 6,948 7,288 7,645 8,020 8,413 8,825 9,257
Other Current Assets 428 404 326 253 264 284 299 336 374 387
Total Current Assets 16,460 19,277 16,614 23,847 25,342 26,322 27,720 29,956 31,366 32,169
Net Property, Plant & Equipment 26,300 25,707 26,735 28,668 29,958 31,306 32,715 34,187 35,726 37,333
Property, Plant & Equipment - Gross 34,132 33,933 35,933 39,099 41,677 44,371 47,187 50,129 53,204 56,417
Accumulated Depreciation 7,832 8,226 9,198 10,431 11,719 13,065 14,472 15,942 17,478 19,083
Intangible Assets 213 156 - - - - - - - -
Other Assets 1,504 2,120 2,194 2,225 2,257 2,289 2,322 2,355 2,389 2,423
Total Assets 44,477 47,260 45,550 54,740 57,558 59,917 62,757 66,498 69,481 71,926
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt 586 303 606 409 391 391 331 331 261 208
Accounts Payable 9,348 9,931 6,760 6,352 6,634 7,122 7,498 8,434 9,377 9,710
Income Tax Payable 379 1,022 809 787 621 478 571 663 597 618
Other Current Liabilities 1,616 1,867 1,805 1,142 1,193 1,280 1,348 1,516 1,686 1,746
Accrued Payroll 314 287 342 221 231 248 261 294 327 338
Total Current Liabilities 11,929 13,123 9,980 8,911 9,070 9,519 10,010 11,238 12,247 12,621
Long-Term Debt 6,463 6,261 5,780 6,920 7,111 7,134 7,168 7,197 7,215 7,218
Provision for Risks & Charges 1,706 1,086 1,552 1,906 1,951 1,956 1,950 1,957 1,944 1,931
Deferred Tax Liabilities 5,860 6,601 6,607 7,069 7,564 7,489 8,013 7,933 8,488 9,082
Other Liabilities 424 243 387 423 429 435 441 448 454 460
Total Liabilities 26,382 27,314 24,306 25,229 26,125 26,533 27,581 28,773 30,347 31,312
Common Equity 7,329 7,194 7,123 7,145 7,144 7,142 7,141 7,139 7,138 7,136
Retained Earnings 17,032 18,970 22,046 25,117 27,211 28,489 30,076 31,937 33,223 34,481
Cumulative Translation Adjustment/Unrealized For. Exch. Gain666 408 1 950 1,889 2,820 3,782 4,746 5,785 6,905
Other Appropriated Reserves (558) (58) (368) 4,266 3,604 3,519 2,949 2,867 2,148 1,450
Treasury Stock (6,437) (7,054) (8,125) (8,625) (9,125) (9,325) (9,525) (9,725) (9,925) (10,125)
Total Shareholders' Equity 18,032 19,460 20,677 28,853 30,722 32,646 34,422 36,964 38,369 39,847
Accumulated Minority Interest 63 486 567 658 710 739 754 761 765 767
Total Equity 18,095 19,946 21,244 29,511 31,433 33,384 35,176 37,725 39,134 40,614
Total Liabilities & Shareholders' Equity 44,477 47,260 45,550 54,740 57,558 59,917 62,757 66,498 69,481 71,926
Page 17
Valero Energy Corporation
Cash Flow Statement
Fiscal Years Ending Dec. 31 2006 2007 2008 2009 2010 2011 2012 2013 2014
Operating Activities
Net Income / Starting Line 5,463 5,234 (1,131) (1,982) 324 2,089 2,080 2,728 3,711
Depreciation, Depletion & Amortization 1,155 1,376 1,476 1,527 1,473 1,534 1,574 1,720 1,690
Depreciation and Depletion 812 1,328 1,443 973 985 1,100 1,100 1,200 1,201
Amortization of Intangible Assets 343 48 33 554 488 434 474 520 489
Deferred Taxes & Investment Tax Credit 290 (131) 675 (343) 347 461 963 501 445
Other Funds (189) (752) 3,747 2,539 892 70 955 (307) 123
Funds from Operations 6,719 5,727 4,767 1,741 3,036 4,154 5,572 4,642 5,969
Changes in Working Capital (406) (469) (1,675) 73 9 (116) (302) 922 (1,728)
Receivables (799) (3,195) 4,618 (1,474) (134) (2,982) 488 (743) 2,730
Inventories (405) (249) (705) (77) (407) 643 (282) (13) (1,014)
Accounts Payable 1,362 2,557 (4,985) 1,475 670 2,004 (113) 977 (3,149)
Income Taxes Payable (162) 481 (446) 95 (3) 124 (380) 646 (319)
Other Accruals (54) (20) 182 73 (99) (18) 13 53 38
Other Assets/Liabilities (348) (43) (339) (19) (18) 113 (28) 2 (14)
Net Operating Cash Flow 6,313 5,258 3,092 1,814 3,045 4,038 5,270 5,564 4,241
Investing Activities
Capital Expenditures (3,756) (2,260) (2,790) (2,306) (1,730) (2,355) (2,931) (2,121) (2,802)
Capital Expenditures (Fixed Assets) (3,187) (2,260) (2,790) (2,306) (1,730) (2,355) (2,931) (2,121) (2,153)
Capital Expenditures (Other Assets) (569) - - - - - - - (649)
Net Assets from Acquisitions (101) - (144) (29) (260) (2,275) (80) - -
Sale of Fixed Assets & Businesses 64 2,491 488 16 767 - 160 - -
Purchase/Sale of Investments 854 (209) - 27 330 - - - -
Purchase of Investments 26 209 - - - - - - -
Sale/Maturity of Investments 880 - - 27 330 - - - -
Other Funds (32) (604) (416) (1,000) (512) (668) (500) (691) (42)
Other Uses (40) (604) (440) (1,000) (535) (668) (500) (691) (42)
Other Sources 8 - 24 - 23 - - - -
Net Investing Cash Flow (2,971) (582) (2,862) (3,292) (1,405) (5,298) (3,351) (2,812) (2,844)
Financing Activities
Cash Dividends Paid (184) (271) (299) (324) (114) (169) (360) (462) (566)
Change in Capital Stock (1,898) (5,629) (939) 806 7 (300) (222) (500) (1,249)
Repurchase of Common & Preferred Stk. (2,020) (5,788) (955) (4) (13) (349) (281) (928) (1,296)
Sale of Common & Preferred Stock 122 159 16 810 20 49 59 428 47
Proceeds from Sale of Stock - 159 - 810 20 - - - -
Proceeds from Stock Options 122 - 16 - - 49 59 428 47
Issuance/Reduction of Debt, Net (303) 1,782 (374) 713 1,027 (778) (562) 537 (172)
Change in Current Debt - - - - - (4) - 1,017 -
Change in Long-Term Debt (303) 1,782 (374) 713 1,027 (774) (562) (480) (172)
Issuance of Long-Term Debt - 2,245 296 1,037 1,544 - 1,400 - 28
Reduction in Long-Term Debt (303) (463) (670) (324) (517) (774) (1,962) (480) (200)
Other Funds 197 287 5 94 (104) 181 (89) 262 57
Other Uses (9) (24) (4) (861) (1,329) - (1,650) (315) -
Other Sources 206 311 9 955 1,225 181 1,561 577 57
Net Financing Cash Flow (2,188) (3,831) (1,607) 1,289 816 (1,066) (1,233) (163) (1,930)
Exchange Rate Effect 1 29 (47) 65 53 16 13 (20) (70)
Beginning Cash 466 1,621 2,495 1,071 947 3,334 1,024 1,723 4,292
Ending Cash 1,621 2,495 1,071 947 3,334 1,024 1,723 4,292 3,689
Net Change in Cash 1,155 874 (1,424) (124) 2,509 (2,310) 699 2,569 (603)
Free Cash Flow 3,126 2,998 302 (492) 1,315 1,683 2,339 3,443 2,088
Free Cash Flow per Share 5 5 1 (1) 2 3 4 6 4
Free Cash Flow Yield (%) 10 7 3 (5) 10 14 12 12 8
Page 18
Valero Energy Corporation
Cash Flow Statement
Fiscal Years Ending Dec. 31 2015 2016 2017 2018 2019 2020 CV 2021
Operating Activities
Net Income / Starting Line 4,088 3,225 2,482 2,968 3,445 3,101 3,212
Depreciation 985 1,100 1,100 1,200 1,201 1,233 1,288
Amortization of Intangible Assets 326 340 365 384 432 481 498
Accounts Receivables, Net 866 (232) (404) (317) (705) (704) (245)
Inventories (325) (340) (357) (375) (393) (412) (432)
Accounts Payable (408) 282 488 377 936 942 333
Income Taxes Payable (22) (166) (143) 93 92 (66) 21
Accrued Payroll (121) 10 17 13 33 33 12
Deffered Taxes 566 605 599 641 635 679 727
Net Operating Cash Flow 5,955 4,823 4,147 4,985 5,676 5,287 5,413
Investing Activities
Short Term Investments (131) (134) (137) (140) (143) (147) (150)
Capital Expenditures (3,166) (2,578) (2,694) (2,816) (2,942) (3,075) (3,213)
Capitalization of Intangible Assets - - - - - - -
Other Assets (31) (32) (32) (33) (33) (34) (34)
Net Investing Cash Flow (3,197) (2,610) (2,727) (2,848) (2,975) (3,108) (3,247)
Financing Activities
Stock Repurchase (500) (500) (200) (200) (200) (200) (200)
Proceeds from Stock Options 22 22 22 22 11 - -
Change in Current Debt (197) (18) - (60) - (70) (52)
Change in Long-Term Debt 1,140 191 22 34 29 17 3
Payment of Dividends (1,016) (1,131) (1,203) (1,381) (1,584) (1,815) (1,955)
Net Financing Cash Flow (551) (1,435) (1,359) (1,585) (1,743) (2,068) (2,204)
Beginning Cash 3,689 5,896 6,673 6,734 7,286 8,243 8,353
Net Change in Cash 2,207 777 62 552 957 110 (37)
Ending Cash 5,896 6,673 6,734 7,286 8,243 8,353 8,316
Page 19
Valero Energy Corporation
Common Size Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
Sales 139,250.00 138,074.00 130,844.00 100% 100% 100% 100% 100% 100% 100%
COGS excluding D&A 94.70% 95.11% 94.23% 90.28% 92.00% 93.56% 93.07% 93.07% 94.04% 94.04%
Depreciation 0.79% 0.87% 0.92% 1.38% 1.38% 1.34% 1.33% 1.24% 1.16% 1.17%
Amortization of Intangibles 0.34% 0.38% 0.37% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36%
Gross Income 4.17% 3.64% 4.48% 7.98% 6.26% 4.73% 5.23% 5.33% 4.44% 4.43%
SG&A Expense 0.50% 0.53% 0.55% 0.54% 0.54% 0.54% 0.54% 0.54% 0.54% 0.54%
Other Operating Expense 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
EBIT (Operating Income) 3.67% 3.11% 3.93% 7.44% 5.72% 4.19% 4.69% 4.79% 3.90% 3.89%
Nonoperating Income - Net 0.06% 0.28% 0.03% 0.12% 0.14% 0.10% 0.12% 0.12% 0.12% 0.12%
Interest Expense 0.22% 0.26% 0.30% 0.41% 0.41% 0.38% 0.37% 0.33% 0.28% 0.27%
Unusual Expense - Net 0.84% 0.24% -0.59% 0.17% -0.06% -0.16% -0.02% -0.08% -0.09% -0.06%
Fixed Assets Impairment 0.73% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Reorganization and Restructure Expense 0.03% -- -- -- -- -- -- -- -- --
Goodwill Write Off -- -- -- -- -- -- -- -- -- --
Legal Claim Expense -- -- -- -- -- -- -- -- -- --
Other Unusual Expense 0.09% 0.24% -0.59% -0.09% -0.14% -0.27% -0.17% -0.19% -0.21% -0.19%
Pretax Income 2.66% 2.88% 4.24% 7.03% 5.31% 3.81% 4.32% 4.46% 3.61% 3.61%
Income Taxes 1.17% 0.91% 1.36% 2.46% 1.86% 1.33% 1.51% 1.56% 1.26% 1.26%
Other After Tax Adjustments 0.00% 0.00% -0.42% - - - - - - -
Consolidated Net Income 1.49% 1.97% 2.46% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35%
Minority Interest 0.00% 0.01% 0.06% - - - - - - -
Net Income 1.50% 1.97% 2.40% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35%
Preferred Dividends 0.00% 0.00% 0.00% - - - - - - -
Net Income available to Common 1.50% 1.97% 2.40% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35%
EPS (recurring) 0.00% 0.00% 0.00% 0.01% 0.01% 0.00% 0.01% 0.01% 0.00% 0.00%
Total Shares Outstanding 0.40% 0.39% 0.39% 0.57% 0.54% 0.50% 0.47% 0.42% 0.38% 0.36%
Dividends per Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Payout Ratio 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Page 20
Valero Energy CorporationCommon Size Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
Sales 139,250 138,074 130,844 89,468 93,437 100,305 105,611 118,793 132,067 136,760
Assets
Cash & Short-Term Investments 1.24% 3.11% 2.82% 6.59% 7.14% 6.71% 6.90% 6.94% 6.33% 6.08%
Short-Term Receivables 5.99% 6.39% 4.57% 6.83% 6.68% 6.36% 6.17% 5.61% 5.16% 5.09%
Accounts Receivables, Net 5.81% 6.30% 4.21% 5.19% 5.22% 5.26% 5.30% 5.30% 5.30% 5.30%
Inventories 4.29% 4.17% 5.06% 7.77% 7.80% 7.62% 7.59% 7.08% 6.68% 6.77%
Other Current Assets 0.31% 0.29% 0.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Current Assets 11.82% 13.96% 12.70% 26.65% 27.12% 26.24% 26.25% 25.22% 23.75% 23.52%
Net Property, Plant & Equipment 18.89% 18.62% 20.43% 32.04% 32.06% 31.21% 30.98% 28.78% 27.05% 27.30%
Property, Plant & Equipment - Gross 24.51% 24.58% 27.46% 43.70% 44.60% 44.24% 44.68% 42.20% 40.29% 41.25%
Accumulated Depreciation 5.62% 5.96% 7.03% 11.66% 12.54% 13.03% 13.70% 13.42% 13.23% 13.95%
Total Investments and Advances -- -- 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Intangible Assets 0.15% 0.11% -- -- -- -- -- -- -- --
Other Assets 0.15% 1.54% 1.68% 2.49% 2.42% 2.28% 2.20% 1.98% 1.81% 1.77%
Deferred Charges -- -- 0.01% -- -- -- -- -- -- --
Tangible Other Assets 1.08% 1.54% 1.68% 2.49% 2.42% 2.28% 2.20% 1.98% 1.81% 1.77%
Total Assets 31.94% 34.23% 34.81% 61.18% 61.60% 59.74% 59.42% 55.98% 52.61% 52.59%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt 0.42% 0.22% 0.46% 0.46% 0.42% 0.39% 0.31% 0.28% 0.20% 0.15%
Accounts Payable 6.71% 7.19% 5.17% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10%
Income Tax Payable 0.27% 0.74% 0.62% 0.88% 0.66% 0.48% 0.54% 0.56% 0.45% 0.45%
Other Current Liabilities 1.16% 1.35% 1.38% - - - - - - -
Accrued Payroll 0.23% 0.21% 0.26% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Miscellaneous Current Liabilities 0.94% 1.14% 1.12% - - - - - - -
Total Current Liabilities 8.57% 9.50% 7.63% 9.96% 9.71% 9.49% 9.48% 9.46% 9.27% 9.23%
Long-Term Debt 4.64% 4.53% 4.42% 7.73% 7.61% 7.11% 6.79% 6.06% 5.46% 5.28%
Provision for Risks & Charges 1.23% 0.79% 1.19% 2.13% 2.09% 1.95% 1.85% 1.65% 1.47% 1.41%
Deferred Tax Liabilities 4.21% 4.78% 5.05% 7.90% 8.10% 7.47% 7.59% 6.68% 6.43% 6.64%
Other Liabilities 0.30% 0.18% 0.30% 0.47% 0.46% 0.43% 0.42% 0.38% 0.34% 0.34%
Other Liabilities (excl. Deferred Income) 0.30% 0.18% 0.30% 0.47% 0.46% 0.43% 0.42% 0.38% 0.34% 0.34%
Deferred Income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Liabilities 18.95% 19.78% 18.58% 28.20% 27.96% 26.45% 26.12% 24.22% 22.98% 22.90%
Common Equity 5.26% 5.21% 5.44% 7.99% 7.65% 7.12% 6.76% 6.01% 5.40% 5.22%
Retained Earnings 12.23% 13.74% 16.85% 28.07% 29.12% 28.40% 28.48% 26.88% 25.16% 25.21%
Cumulative Translation Adjustment/Unrealized For. Exch. Gain0.48% 0.30% 0.00% 1.06% 2.02% 2.81% 3.58% 3.99% 4.38% 5.05%
Other Appropriated Reserves -0.40% -0.04% -0.28% 4.77% 3.86% 3.51% 2.79% 2.41% 1.63% 1.06%
Treasury Stock -4.62% -5.11% -6.21% -9.64% -9.77% -9.30% -9.02% -8.19% -7.52% -7.40%
Total Shareholders' Equity 12.95% 14.09% 15.80% 32.25% 32.88% 32.55% 32.59% 31.12% 29.05% 29.14%
Accumulated Minority Interest 0.05% 0.35% 0.43% 0.74% 0.76% 0.74% 0.71% 0.64% 0.58% 0.56%
Total Equity 12.99% 14.45% 16.24% 32.99% 33.64% 33.28% 33.31% 31.76% 29.63% 29.70%
Total Liabilities & Shareholders' Equity 31.94% 34.23% 34.81% 61.18% 61.60% 59.74% 59.42% 55.98% 52.61% 52.59%
Page 21
Valero Energy Corporation
Value Driver Estimation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
NOPLAT
EBITA
Operating Revenues 139,250.00 138,074.00 130,844.00 89,467.68 93,436.56 100,304.65 105,610.72 118,792.66 132,067.27 136,760.30
(Cost of Goods Sold) 131,866.00 131,328.00 123,294.00 80,773.16 85,961.64 93,849.64 98,295.30 110,561.94 124,190.35 128,604.16
(SG&A) 698.00 728.00 724.00 483.13 504.56 541.65 570.30 641.48 713.16 738.51
(Depreciation) 1,100.00 1,200.00 1,201.00 1,232.73 1,288.20 1,346.17 1,406.75 1,470.05 1,536.20 1,605.33
(Amortization of Non-Goodwill Intangibles) 474.00 520.00 489.00 325.66 340.11 365.11 384.42 432.41 480.72 497.81
(R&D Expenses) - - - - - - - - - -
(Other Operating Expenses) - - - - - - - - - -
Implied Lease Interest 67.91 81.72 75.16 73.40 79.27 85.61 92.46 99.86 107.85 116.48
EBITA 5,179.91 4,379.72 5,211.16 6,726.40 5,421.33 4,287.70 5,046.42 5,786.64 5,254.67 5,430.97
ADJUSTED TAXES
Marginal Tax Rate 43.9% 31.5% 32.0% 35% 35% 35% 35% 35% 35% 35%
Provision for Income Tax 1,626.00 1,254.00 1,777.00 2,201.11 1,736.29 1,336.43 1,597.89 1,855.13 1,669.94 1,729.62
Tax on Interest Expense 137.41 114.98 127.04 127.44 133.43 134.30 136.00 135.24 131.44 130.46
Tax on Non-operating Income 36.00 120.33 14.40 - - - - - - -
Tax Shield on Implied Lease Interest 29.81 25.74 24.05 25.69 27.75 29.96 32.36 34.95 37.75 40.77
Tax on Unusual Expense 515.83 104.90 (245.76) - - - - - - -
Total Adjusted Taxes 906.96 888.06 1,857.27 2,047.98 1,575.11 1,172.17 1,429.53 1,684.94 1,500.75 1,558.40
CHANGE IN DEFERRED TAXES
From Cash Flow Statement 963.00 501.00 445.00 565.56 605.15 599.10 641.03 634.62 679.05 726.58
NOPLAT 5,235.95 3,992.66 3,798.89 5,243.98 4,451.37 3,714.63 4,257.92 4,736.32 4,432.97 4,599.16
Invested Capital
Operating Current Assets
"Normal" Cash 1,127.93 1,118.40 1,059.84 724.69 756.84 812.47 855.45 962.22 1,069.74 1,107.76
Accounts Receivable 8,087.00 8,699.00 5,509.00 4,643.25 4,875.41 5,279.19 5,595.94 6,300.48 7,004.53 7,249.69
Inventory 5,973.00 5,758.00 6,623.00 6,947.53 7,287.96 7,645.07 8,019.67 8,412.64 8,824.86 9,257.28
Other Current Operating Assets 428.00 404.00 326.00 253.19 264.43 283.86 298.88 336.18 373.75 387.03
Non Interest-Bearing Current Liabilities
Accounts Payable 9,348.00 9,931.00 6,760.00 6,352.21 6,634.00 7,121.63 7,498.36 8,434.28 9,376.78 9,709.98
Accrued Expenses 314.00 287.00 342.00 221.27 231.09 248.07 261.20 293.80 326.63 338.24
Income Taxes Payable 379.00 1,022.00 809.00 786.90 620.72 477.78 571.25 663.21 597.00 618.34
Other Current Liabilities 1,616.00 1,867.00 1,805.00 1,141.90 1,192.56 1,280.22 1,347.94 1,516.19 1,685.61 1,745.51
Net Operating Working Capital 5,574.93 4,739.40 5,606.84 5,208.28 5,698.82 6,173.11 6,439.14 6,620.23 6,972.47 7,335.20
Net Property, Plant, and Equiptment
Gross Property, Plant, And Equiptment 34,132.00 33,933.00 35,933.00 39,098.80 41,677.07 44,371.35 47,186.88 50,129.11 53,203.73 56,416.72
(Accumulated Depreciation) 7,832.00 8,226.00 9,198.00 10,430.73 11,718.93 13,065.10 14,471.84 15,941.89 17,478.10 19,083.43
Net Property, Plant, and Equiptment 26,300.00 25,707.00 26,735.00 28,668.08 29,958.14 31,306.25 32,715.04 34,187.21 35,725.64 37,333.29
Plus: Net Other Operating Assets (Net D&A)
Net Intangible Assets (Non-Goodwill) 213.00 156.00 - - - - - - - -
Capitalized PV of Operating Leases 1,021.50 939.50 917.50 990.90 1070.17 1155.79 1248.25 1348.11 1455.96 1572.43
Other Operating Assets 1,504.00 2,120.00 2,194.00 2,225.37 2,257.20 2,289.47 2,322.21 2,355.42 2,389.10 2,423.27
Total Net Other Operating Assets 2,738.50 3,215.50 3,111.50 3,216.27 3,327.37 3,445.26 3,570.46 3,703.53 3,845.06 3,995.70
Less: Other Operating Liabilities
Warranty Liabilities (Long Term) -- -- -- -- -- -- -- -- -- --
Other Non-Interest Bearing Op. Liabilities 1,616.00 1,867.00 1,805.00 1,141.90 1,192.56 1,280.22 1,347.94 1,516.19 1,685.61 1,745.51
Total Other Operating Liabilities 1,616.00 1,867.00 1,805.00 1,141.90 1,192.56 1,280.22 1,347.94 1,516.19 1,685.61 1,745.51
Invested Capital 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 46,918.68
VLO Drivers
Invested capital 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 46,918.68
NOPLAT 5,235.95 3,992.66 3,798.89 5,243.98 4,451.37 3,714.63 4,257.92 4,736.32 4,432.97 4,599.16
ROIC 16.85% 12.10% 11.95% 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25%
EP 2,208.10 778.16 701.53 1,966.07 949.16 33.07 395.89 705.54 244.55 229.28
FCF 3,319.91 5,195.18 1,945.46 2,941.59 2,610.33 1,861.99 2,525.63 3,118.23 2,570.20 2,538.04
ROIC Calculations
NOPLAT 5,235.95 3,992.66 3,798.89 5,243.98 4,451.37 3,714.63 4,257.92 4,736.32 4,432.97 4,599.16
Beginning IC 31,081.38 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56
ROIC 16.85% 12.10% 11.95% 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25%
EP Calculations
IC 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 46,918.68
ROIC 16.85% 12.10% 11.95% 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25%
WACC 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74%
(ROIC-WACC) 7.10% 2.36% 2.21% 5.84% 2.64% 0.09% 1.00% 1.71% 0.57% 0.51%
EP 2208.10 778.16 701.53 1966.07 949.16 33.07 395.89 705.54 244.55 229.28
Page 22
Valero Energy Corporation
Weighted Average Cost of Capital (WACC) Estimation
2014
Risk Free 2.87%
Risk Premium 5.75%
Beta 1.45
Cost of Equity 11.21%
Debt Rating BBB+
Pre-Tax Cost of Debt 5.40%
Tax Rate 35%
After-Tax Cost of Debt 3.51%
Cost of Preferred 0.0%
MV Weight of Equity 81%
MV Weight of Debt 19%
MV Weight of Pfd 0%
WACC 9.74%
Page 23
Valero Energy Corporation
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 3.50%
CV ROIC 10.25%
WACC 9.74%
Cost of Equity 11.21%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E CV (2021E)
DCF Model
NOPLAT 5243.98 4451.37 3714.63 4257.92 4736.32 4432.97 4599.16
Change in Invested Capital 2302.39 1841.04 1852.64 1732.29 1618.09 1862.77 2061.12
FCF 2941.59 2610.33 1861.99 2525.63 3118.23 2570.20 2538.04
CV 48530.87
Discount Factor 1.10 1.20 1.32 1.45 1.59 1.75 1.75
PV of FCF's 2680.46 2167.46 1408.84 1741.34 1959.07 1471.42 27783.60
Value of Operations 39212.20
Excess Cash 2629
Short Term Investments 5976
ESOP -22
PV of Operating Leases -917
Debt -6386
VE 40491.57
Shares Outstanding 514.30
Target Price DEC 31, 2014 78.73$
Target Price Today
(Partial Year Adjustment) 84.22$
EP Model
NOPLAT 5243.98 4451.37 3714.63 4257.92 4736.32 4432.97 4599.16
Beginning IC 33648 35951 37792 39644 41377 42995 44858
ROIC 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25%
Economic Profic 1966.07 949.16 33.07 395.89 705.54 244.55 229.28
CV 3673.31
Discount Factor 1.10 1.20 1.32 1.45 1.59 1.75 1.75
PV of Economic Profit 1791.54 788.13 25.02 272.95 443.26 140.00 2102.95
SUM of PV's 5564
ADD IC 2014 33648
Value of Operations 39212.20
Excess Cash 2629
Short Term Investments 5976
ESOP -22
PV of Operating Leases -917
Debt -6386
VE 40491.57
Shares Outstanding 514.30
Target Price DEC 31, 2014 78.73$
Target Price Today
(Partial Year Adjustment) 84.22$
Page 24
Valero Energy Corporation
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E CV (2021E)
EPS 8.04$ 6.41$ 4.95$ 5.93$ 6.90$ 6.24$ 6.48$
Dividend 2.00 2.25 2.40 2.76 3.17 3.65 3.94
CV 122.90
Discount Factor 1.11 1.24 1.38 1.53 1.70 1.89 1.89
PV's of Dividends 1.80 1.82 1.75 1.80 1.87 1.93 64.98
Key Assumptions
CV growth (Dividends) 8.00%
CV ROE 8.06%
Cost of Equity 11.21%
Intrinsic Value (12/31/14) 75.94$
Partial Year Adjust 81.72$
Page 25
Valero Energy Corporation As of 11-3-15Relative Valuation Models
EPS EPSTicker Company Price 2015E 2016E P/E 15 P/E 16
PSX Phillips 66 $92.67 $8.71 $7.30 10.6 12.7
TSO Tesoro Corp. $112.53 $12.80 $8.63 8.8 13.0
HFC HollyFrontier Corp. $50.99 $3.03 $4.39 16.8 11.6
WNR Western Refining $45.26 $5.56 $3.54 8.1 12.8
MPC Marathon Petroleum $54.63 $6.36 $5.17 8.6 10.6 Average 9.0 12.1
VLO Valero Energy Corporation $69.61 8.04 6.41 8.7 10.9
Implied Value:
Relative P/E (EPS15) $ 72.72
Relative P/E (EPS16) 77.88$
Page 26
Valero Energy Corporation
Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E
Liquidity Ratios
Current Ratio 1.38 1.47 1.66 2.68 2.79 2.77 2.77 2.67 2.56 2.55
Operating Cash Flow Ratio 0.38 0.32 0.46 0.64 0.54 0.44 0.48 0.47 0.41 0.41
Quick Ratio 0.40 0.49 0.41 0.67 0.69 0.70 0.71 0.75 0.74 0.73
Activity or Asset-Management Ratios
Asset Turnover Ratio 3.13 2.92 2.87 1.63 1.62 1.67 1.68 1.79 1.90 1.90
Inventory Turnover Ratio 23.31 23.98 19.76 12.88 12.82 13.12 13.17 14.12 14.97 14.77
Net Working Capital Turnover Ratio 30.73 22.44 19.72 5.99 5.74 5.97 5.96 6.35 6.91 7.00
Financial Leverage Ratios
Debt to Equity 0.39 0.34 0.31 0.25 0.24 0.23 0.22 0.20 0.19 0.19
Interest Coverage 16.33 11.78 12.94 18.27 14.01 10.95 12.75 14.72 13.70 14.26
Equity Multiplier 2.46 2.37 2.14 1.85 1.83 1.79 1.78 1.76 1.78 1.77
Profitability Ratios
Profit Margin 1.50% 1.97% 2.40% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35%
Return on Assets 4.68% 5.75% 6.89% 7.47% 5.60% 4.14% 4.73% 5.18% 4.46% 4.47%
Return on Equity 11.55% 13.97% 15.19% 14.17% 10.50% 7.60% 8.62% 9.32% 8.08% 8.06%
Payout Policy Ratios
Dividend Payout Ratio 12% 16% 21% 25% 35% 48% 47% 46% 59% 61%
Dividend Yield 0.93% 1.22% 1.51% 2.87% 3.23% 3.45% 3.96% 4.56% 5.24% 5.66%
Page 27
Sensitivity Analysis
Beta84.22$ 1.2 1.3 1.35 1.4 1.45 1.5 1.55 1.6 1.65
2.00% 97.60 91.34 88.51 85.86 83.37 81.03 78.82 76.74 74.77
2.50% 98.78 92.06 89.05 86.24 83.61 81.15 78.84 76.67 74.62
3.00% 100.17 92.90 89.67 86.68 83.89 81.29 78.86 76.58 74.45
CV (Noplat) 3.50% 101.83 93.90 90.41 87.19 84.22 81.45 78.89 76.49 74.25
4.00% 103.86 95.09 91.28 87.80 84.60 81.64 78.91 76.38 74.03
4.50% 106.39 96.54 92.34 88.53 85.05 81.87 78.95 76.25 73.76
5.00% 109.62 98.36 93.64 89.41 85.60 82.14 78.99 76.10 73.46
Risk Free84.22$ 2.67% 2.72% 2.77% 2.82% 2.87% 2.92% 2.97% 3.02% 3.07%
4.50% 111.38 110.47 109.58 108.71 107.85 107.00 106.17 105.35 104.55
5.00% 99.63 98.91 98.21 97.52 96.84 96.17 95.51 94.86 94.21
5.500% 90.26 89.69 89.12 88.56 88.01 87.46 86.92 86.39 85.87
Risk Premium 5.75% 86.26 85.74 85.22 84.72 84.22 83.72 83.23 82.75 82.27
6.00% 82.63 82.15 81.69 81.22 80.77 80.31 79.87 79.43 78.99
6.50% 76.29 75.89 75.50 75.11 74.72 74.34 73.97 73.60 73.23
7.00% 70.94 70.60 70.27 69.93 69.61 69.28 68.96 68.64 68.33
SG&A % of Revenue
84.22$ 0.3400% 0.3900% 0.4400% 0.4900% 0.54% 0.5900% 0.6400% 0.6900% 0.7400%
0.51% 89.66 88.55 87.45 86.34 85.24 84.13 83.03 81.92 80.82
0.61% 89.32 88.21 87.11 86.00 84.90 83.79 82.69 81.58 80.48
0.71% 88.98 87.87 86.77 85.66 84.56 83.45 82.35 81.24 80.14
Normal Cash 0.81% 88.63 87.53 86.43 85.32 84.22 83.11 82.01 80.90 79.80
% of Revenue 0.91% 88.29 87.19 86.08 84.98 83.88 82.77 81.67 80.56 79.46
1.01% 87.95 86.85 85.74 84.64 83.53 82.43 81.33 80.22 79.12
1.11% 87.61 86.51 85.40 84.30 83.19 82.09 80.98 79.88 78.78
Cost of Equity84.22$ 9.21% 9.71% 10.21% 10.71% 11.21% 11.71% 12.21% 12.71% 13.21%
4.90% 83.71 84.05 84.38 84.71 85.04 85.37 85.70 86.03 86.36
5.00% 83.55 83.88 84.21 84.54 84.87 85.20 85.53 85.86 86.19
5.10% 83.39 83.72 84.05 84.38 84.71 85.04 85.36 85.69 86.02
5.20% 83.23 83.56 83.89 84.21 84.54 84.87 85.20 85.53 85.85
5.30% 83.07 83.40 83.72 84.05 84.38 84.71 85.03 85.36 85.69
Cost of Debt 5.40% 82.91 83.24 83.56 83.89 84.22 84.54 84.87 85.20 85.52
5.50% 82.75 83.07 83.40 83.73 84.05 84.38 84.71 85.03 85.36
5.60% 82.59 82.92 83.24 83.57 83.89 84.22 84.54 84.87 85.19
5.70% 82.43 82.76 83.08 83.41 83.73 84.06 84.38 84.71 85.03
5.80% 82.27 82.60 82.92 83.25 83.57 83.90 84.22 84.54 84.87
5.90% 82.12 82.44 82.77 83.09 83.41 83.74 84.06 84.38 84.71
Page 28
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol VLO
Current Stock Price $69.61
Risk Free Rate 2.87%
Current Dividend Yield 2.87%
Annualized St. Dev. of Stock Returns 38.80%
Average Average B-S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 4,669,221 21.48 4.50 43.20$ 201,695,920$
In Millions 201.70$
Total 4,669,221 21.48$ 4.50 51.36$ 201,696,122$
Page 29
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 4,669,221
Average Time to Maturity (years): 4.50
Expected Annual Number of Options Exercised: 1,037,605
In Millions 1.04
Current Average Strike Price: 21.48$
Cost of Equity: 11.21%
Current Stock Price: $69.61
2015E 2016E 2017E 2018E 2019E 2020E 2021E
Increase in Shares Outstanding (Millions): 1.04 1.04 1.04 1.04 0.52 0.00 0.00
Average Strike Price: 21.48$ 21.48$ 21.48$ 21.48$ 21.48$ 21.48$ 21.48$
Increase in Common Stock Account: 22 22 22 22 11 - -
Change in Treasury Stock 500 500 200 200 200 200 200
Expected Price of Repurchased Shares: 69.61$ 77.41$ 86.09$ 95.74$ 106.47$ 118.40$ 131.67$
Number of Shares Repurchased (Millions): 7.18 6.46 2.32 2.09 1.88 1.69 1.52
Shares Outstanding (beginning of the year) 514.30 508.15 502.73 501.45 500.39 499.04 497.35
Plus: Shares Issued Through ESOP 1.04 1.04 1.04 1.04 0.52 0.00 0.00
Less: Shares Repurchased in Treasury 7.18 6.46 2.32 2.09 1.88 1.69 1.52
Shares Outstanding (end of the year in Millions) 508.15 502.73 501.45 500.39 499.04 497.35 495.83
Page 30
Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (2007) Present Value of Operating Lease Obligations (2006) Present Value of Operating Lease Obligations (2005)
Operating Operating Operating Operating Operating Operating Operating Operating Operating Operating
#REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases
2015 314.00 2014 305.00 2013 337.00 2012 291.00 2011 353.00 2010 348.00 2009 397.00 2008 384.00 2007 413.00 2006 320.00
2016 229.00 2015 230.00 2014 250.00 2013 198.00 2012 237.00 2011 230.00 2010 282.00 2009 298.00 2008 331.00 2007 285.00
2017 159.00 2016 162.00 2015 179.00 2014 131.00 2013 160.00 2012 127.00 2011 179.00 2010 200.00 2009 243.00 2008 226.00
2018 131.00 2017 111.00 2016 133.00 2015 106.00 2014 104.00 2013 86.00 2012 90.00 2011 115.00 2010 161.00 2009 160.00
2019 75.00 2018 95.00 2017 86.00 2016 86.00 2015 85.00 2014 65.00 2013 55.00 2012 59.00 2011 100.00 2010 96.00
Thereafter 275.00 Thereafter 321.00 Thereafter 350.00 Thereafter 294.00 Thereafter 324.00 Thereafter 297.00 Thereafter 270.00 Thereafter 203.00 Thereafter 238.00 Thereafter 443.00
Total Minimum Payments 1183 Total Minimum Payments 1224 Total Minimum Payments 1335 Total Minimum Payments 1106 Total Minimum Payments 1263 Total Minimum Payments 1153 Total Minimum Payments 1273 Total Minimum Payments 1259 Total Minimum Payments 1486 Total Minimum Payments 1530
Less: Interest 266 Less: Interest 284 Less: Interest 314 Less: Interest 257 Less: Interest 288 Less: Interest 261 Less: Interest 271 Less: Interest 248 Less: Interest 298 Less: Interest 383
PV of Minimum Payments 917.50 PV of Minimum Payments 940 PV of Minimum Payments 1021 PV of Minimum Payments 849 PV of Minimum Payments 975 PV of Minimum Payments 892 PV of Minimum Payments 1002 PV of Minimum Payments 1011 PV of Minimum Payments 1188 PV of Minimum Payments 1147
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00%
Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 4.1 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 4.6 Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 2.4 Number Years Implied by Year 6 Payment 4.6
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 314 290.7 1 305 282.4 1 337 312.0 1 291 269.4 1 353 326.9 1 348 322.2 1 397 367.6 1 384 355.6 1 413 382.4 1 320 296.3
2 229 196.3 2 230 197.2 2 250 214.3 2 198 169.8 2 237 203.2 2 230 197.2 2 282 241.8 2 298 255.5 2 331 283.8 2 285 244.3
3 159 126.2 3 162 128.6 3 179 142.1 3 131 104.0 3 160 127.0 3 127 100.8 3 179 142.1 3 200 158.8 3 243 192.9 3 226 179.4
4 131 96.3 4 111 81.6 4 133 97.8 4 106 77.9 4 104 76.4 4 86 63.2 4 90 66.2 4 115 84.5 4 161 118.3 4 160 117.6
5 75 51.0 5 95 64.7 5 86 58.5 5 86 58.5 5 85 57.8 5 65 44.2 5 55 37.4 5 59 40.2 5 100 68.1 5 96 65.3
6 & beyond 75 156.9 6 & beyond 95 185.1 6 & beyond 86 196.7 6 & beyond 86 169.3 6 & beyond 85 183.8 6 & beyond 65 163.9 6 & beyond 55 147.2 6 & beyond 59 116.8 6 & beyond 100 142.4 6 & beyond 96 244.1
PV of Minimum Payments 917.50 PV of Minimum Payments 939.50 PV of Minimum Payments 1021.50 PV of Minimum Payments 848.88 PV of Minimum Payments 975.20 PV of Minimum Payments 891.62 PV of Minimum Payments 1002.26 PV of Minimum Payments 1011.26 PV of Minimum Payments 1187.9 PV of Minimum Payments 1147.1
Assumed Cost of Debt 8.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV2021E
PV of Minimum PMTS 1147.1 1187.9 1011.26 1002.26 891.62 975.20 848.88 1021.50 939.50 917.50 990.90 1070.17 1155.79 1248.25 1348.11 1455.96 1572.43Implied Lease Interest 0 91.8 95.0 80.9 80.2 71.3 78.0 67.9 81.7 75.2 73.4 79.3 85.6 92.5 99.9 107.8 116.5
