Valero Energy Corporation NYSE: VLO
Entry Price: $51.81 Target Price : $66.91
Potential Return : 29.1%
Investment Thesis • Safety
– Lowest Debt/EBITDA in the refiner space – Target Debt/Equity of 20%-‐30% – Commitment to capital allocaGon
• Stock buy back, dividend increases, accreGve refinery projects with IRR of >25%
• Cheap – Trading at a historical low on an EV/EBITDA basis – Trading at a discount to our Sum of the Parts ValuaGon
• Drivers of Growth – Refinery Expansion projects with high 25+ IRR% – Midstream logisGc growth with resource conversion acGviGes – Lower Feedstock Costs
Drivers of Growth • Valero is expanding its Capacity for refining the Gulf Coast and Mid-‐
ConGnent Regions of the country where they experience the highest margins
• New projects create higher volume in an area near Port Arthur in Texas, that gives Valero access to send more refined products broad, enabling them to demand higher margins
• Capacity UGlizaGon rate remains high at 98%, showing strong demand for refined products
• Feedstock Crude Oil Prices should remain under pressure unGl global producGon slows or economic growth accelerates
• Valero's Partnership with the MLP Valero Energy Partners should provide them with the ability to transport Crude and byproducts easier and more efficient
Safety
0
100
200
300
400
500
600
700
800
900
1000
2015 2017 2019 2020 2026 2030 2032 2037 2039 2040 2097
Principal Repayments
Segment InformaGon
($2.00)
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
2009 2010 2011 2012 2013 2014
Opera&ng Income Per Barrel
U.S. Gulf Coast U.S. Mid-‐ConGnent North AtlanGc U.S. West Coast
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2009 2010 2011 2012 2013 2014
OPERATING INCOME BY REGION
U.S. Gulf Coast U.S. Mid-‐ConGnent North AtlanGc U.S. West Coast
U.S. Gulf Coast Region
53.0%
52.0%
50.0%
53.0%
46.0%
44.0%
2.0%
2.0%
2.0%
0.0%
11.0%
11.0%
10.0%
14.0%
20.0%
23.0%
13.0%
16.0%
19.0%
13.0%
17.0%
14.0%
8.0%
6.0%
6.0%
5.0%
4.0%
6.0%
14.0%
13.0%
13.0%
13.0%
13.0%
13.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%
2009
2010
2011
2012
2013
2014
U.S. Gulf Coast Feedstock Inputs
Sour Crude Oil Acidic Crude Oil Sweet Crude Oil Residual Fuel Oil Other Feedstocks Blendstocks
Mid-‐ConGnent Region
9.0%
12.0%
9.0%
9.0%
8.0%
6.0%
80.0%
79.0%
82.0%
81.0%
83.0%
82.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
9.0%
8.0%
8.0%
9.0%
8.0%
11.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%
2009
2010
2011
2012
2013
2014
US. Mid-‐Con&nent Feedstock
Sour Crude Oil Sweet Crude Oil Residual Fuel Oil Other Feedstocks Blendstocks
Capacity Expansion • Increase of 160 MBPD capacity
– Houston ($400M) – Increase by 90 MBPD
– Corpus ChrisG ($350 M) – 70 MBPD
• Mckee Diesel Recovery Project ($100 M) – Annual EBITDA ContribuGon of $100 M
• At average 2014 feedstock prices these projects should increase EBITDA by $600 M per year
Resource Conversion • Spinoff of CST Brands (NYSE:
CST) – Have contracts that maintain
near exclusive distribuGon rights
– Spinoff unlocked shareholder wealth
– Valero recently sold out of remaining stake, that neled the company $1 billion amer tax profit
• Valero Energy Partners (NYSE: VLP) – Midstream gives them the
ability to increase volume and logisGcal efficiency
– Plans to have a logisGcs dropdown of $1 billion in 2015 that will provide them with ease to transport oil
– VLO acts as the GP of VLP and has in their contract that as VLP distributable earnings grow they are enGtled to a larger percentage
Valero Energy CorporaGon and MLP
MLP Profit DistribuGon
2015 Target
2016 Target
$0.002
$0.076
$0.105
$0.126
$0.000
$0.020
$0.040
$0.060
$0.080
$0.100
$0.120
$0.140
2013 2014 2015 E 2016 E
Cash DistribuGons to Valero on a per share basis
Wealth CreaGon
$ -‐
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
2009 2010 2011 2012 2013 2014
Book Value Per share
CAGR : 11.5%
Capital AllocaGon
• Capital spending aimed at increasing advantage Crude Processing
• LogisGc spending seeks to increase transportaGon through pipelines
170 45 5
220
180
665
510
175
45
$0
$250
$500
$750
$1,000
2014 2015 E 2016 E
Capital for LogisGcs
Marines, Docks, Other LogisGcs Pipelines and Tanks Railcars and Unloading
45 40 115 120 150 105
180 110 30
345 490
50
$0
$250
$500
$750
$1,000
2014 2015 E 2016 E
Capital for Key Trends
Natural Gas and Petrochem Other Products Hyrdofracking Advantaged Crude Processing
Public Comparable Analysis
LTM EV/EBITDATangible Book
Value Per SharePrice/ Tangible
Book ValueLTM EBITDA
Margin % Debt/EBITDAHolly Frontier 9.6x $16.23 2.5x 4.4% 1.2xTesoro 8.0x $24.33 3.7x 5.2% 2.0xPhillips 66 6.6x $31.88 2.4x 3.0% 2.0xValero 4.5x $40.20 1.5x 5.8% 0.8x
Average 7.2x $28.16 2.5x 4.6% 1.5xMedian 7.3x $28.11 2.5x 4.8% 1.6x
Adjusted Comps. Current Share
PriceValue with 0% EBITDA Growth
Discount / (Premium)
Expected Growth
Current Market EV/EBITDA
Leverage Adjusted EV/EBITDA
HollyFrontier $40.04 $35.10 -‐12.3% 27.8% 9.58x 9.16xPhillps 66 $76.29 $44.31 -‐41.9% 19.0% 6.47x 6.08xTesero $87.81 $59.13 -‐32.7% 9.0% 7.43x 6.73xValero (minus MLP) $59.66 $61.54 3.2% -‐0.4% 4.54x 4.24x
9.16x
6.08x 6.73x
4.24x
0.00x
1.50x
3.00x
4.50x
6.00x
7.50x
9.00x
HollyFronGer Phillps 66 Tesero Valero (minus MLP)
Leverage Adj. EV/EBITDA
ValuaGon EV/ EBITDA
2014 EV/EBITDA 4.4x
Historical EV/EBITDA MulGple 4.7x
2015 EBITDA $8.19 B
Fair Value $69.63
Sum of the Parts (No Growth)
Fair Value of VLO Standalone
$62.37
Fair Value of VLP $14.31
VLO % Ownership of VLO
70.6%
Value of VLP Alributable to Valero in Terms of Valero Stock
$4.13
Fair Value $66.50