VLO - Valero Energy: Showing Some Signs Of Weakness

2023-06-15 18:38:59 ET

Summary

• The U.S. refiner Valero Energy Corporation reported first-quarter 2023 adjusted earnings of $8.27 per share, a significant increase from $2.31 per share in the year ago quarter.
• Refining throughput volumes were 2,930K barrels per day for the first quarter, up from 2,800K barrels per day last year.
• I recommend buying Valero Energy shares between $107 and $104.5, with possible lower support at $100.

Introduction

San Antonio-based Valero Energy Corporation (VLO) released its first-quarter 2023 results on April 27, 2023.

Note: This article updates my article published on March 10, 2023. I have followed VLO on Seeking Alpha since December 2017.

Valero Energy is one of the three refiners I follow quarterly: Marathon Petroleum, Phillips66, and Valero Energy.

Note: I strongly recommend reading my recent articles on MPC and PSX.

1. Marathon Petroleum (MPC), read my article about the 4Q22 by clicking here.
2. Phillips 66 (PSX), read my article about the 1Q23 by clicking here.

Valero's assets are extensive and located mainly in North America.

1 - 1Q23 Results Snapshot

The U.S. refiner reported first-quarter 2023 adjusted earnings of $8.27 per share, a significant increase from $2.31 per share in the year-ago quarter. The results beat analysts' expectations again.

Total revenues decreased from $38,542 million last year's quarter to $36,439 million in 1Q23 , over the consensus estimate.

VLO increased refinery throughput volumes, and a higher refining margin supported the better-than results.

Finally, Valero completed the Port Arthur Coker project in March and successfully commenced operations on April 2023. It is expected to improve margins and light Product Yields.

Note: R. Lane Riggs, Valero’s President and Chief Operating Officer, has been elected to serve as Valero’s CEO and Board member, effective June 30, 2023.

Joe Gorder, Valero's Chairman, and Chief Executive Officer said in the conference call:

We had another strong quarter with all of our segments performing well. Our refineries operated at 93% capacity utilization rate despite planned maintenance at several facilities. Our ability to optimize and maximize system throughput while undertaking maintenance activities illustrates the benefits from our long-standing commitment to operational excellence. Refining margins were supported by lower industry refining capacity in a backdrop of strong product demand.

The refining margin per throughput barrel decreased to $22.37 from $22.58 the preceding quarter, while the ethanol margin decreased to $0.50 from $10.63.

2- Investment Thesis

I have been a long-term Valero Energy Corporation shareholder for over two decades and intend to keep a sizeable part of my long position. The first quarter showed solid margins, revealing a favorable environment for the refining industry, albeit starting to weaken a little.

The crucial issue at stake here is the extreme volatility of the refining sector, which requires a particular trading/investing strategy that I promote in my marketplace, "The gold and oil corner."

Oil and gas prices have corrected significantly YoY, and VLO has corrected from its recent high.

I believe trading short-term LIFO and profiting from those wild fluctuations attached to this cyclical industry is required. I recommend using 40%-50% of your short-term position while keeping a core long-term stake for a much higher target or enjoying steady dividends.

VLO pays a dividend yield of 3.65% , which is relatively high and safe.

3 - Stock performance

VLO is now down 15% on a one-year basis, outperforming Phillips 66 slightly but down significantly from Marathon Petroleum.

Valero Energy: Selected Financials History - The Raw Numbers (First Quarter Of 2023)

Source: VLO PR .

Revenues, Earnings Details, Free Cash Flow, Throughput Volume, Ethanol Production, And Margins

1 - Revenues were $36.44 b illion in 1Q23

Valero Energy's revenue for the first quarter was $36.44 billion. The company posted a quarterly income of $8.29 per diluted share compared to $2.21 last year.

VLO reported adjusted net income attributable to Valero stockholders of $8.27 per share.

The total cost of sales rose to $32.13 Billion from $36.93 billion last year. Net cash provided by operating activities was $3.17 billion in the first quarter of 2023.

Review of the different segments:

• The refining segment: Adjusted operating income was $4,067 million, up from $1,469 million in the year-ago quarter. Higher refinery throughput volumes benefited the segment.
• The Ethanol segment : Valero declared an adjusted operating profit of $39 million, up from $2 million in the year-ago quarter. It was due to higher ethanol production volumes.
• The Renewable Diesel segment increased to $205 million from $149 million in the year-ago quarter. Renewable diesel sales volumes increased to 2,988 thousand gallons per day, significantly up from 1,738 thousand gallons per day a year ago.

2 - Free cash flow in 1Q23 was $2,905 million.

Note: The generic free cash flow is the Cash from operating activities minus CapEx.

VLO had a trailing 12-month ttm free cash flow of $13,594 million. Free cash flow for the first quarter is $2,905 million , significantly down sequentially.

The quarterly dividend has been increased to $1.02 per share .

Also, $1.5 billion was purchased in 1Q23, representing approximately 11.0 million shares of common stocks.

3 - Net debt dropped to $5.90 billion as of March 31, 2023

Valero Energy had total Cash of $5,521 million in 1Q23, up from $2,638 million last year. Total debt was $11,421 million compared to $13,161 million last year.

Valero indicated that it reduced debt by $199 million in 1Q23. The company said in the press release:

Valero further reduced its debt by $199 million, ending the first quarter of 2023 with $9.0 billion of total debt, $2.4 billion of finance lease obligations and $5.5 billion of cash and cash equivalents. The debt to capitalization ratio, net of cash and cash equivalents, was 18 percent as of March 31, 2023.

4 - Throughput and ethanol production in 1Q23

Refining throughput volumes were 2,930K barrels per day for the first quarter, up from 2,800K barrels per day last year. The graph below shows that sweet crude oil is the most critical segment.

Of the total throughput volume in 1Q23.

5 - 2023 Guidance

The Throughput is expected to be:

• U.S. Gulf Coast 1,730 to 1,780 MBbls/d
• U.S. Mid-Continent 405 to 425 MBbls/d
• North Atlantic 450 to 470 MBbls/d
• U.S. West Coast 250 to 270 MBbls/d.

Technical Analysis (Short-Term) And Commentary

Note: The chart has been adjusted for the dividend.

VLO forms an ascending channel pattern with resistance at $115.55 and support at $105.2.

Ascending channel patterns or rising channels are short-term bullish in that a stock moves higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. The ascending channel pattern is often followed by lower prices, but only after a downside penetration of the lower trend line.

I regularly promote keeping a core long-term position and using about 40%-60% to trade LIFO in my marketplace while waiting for a higher final price target for your core position.

Thus, the trading strategy is to sell about 40%-50% between $115 and $116.5 with possible higher resistance at $122.3 and wait for a retracement between $107 and $104.5 with possible lower support at $100.

Valero Energy Corporation stock is highly correlated to the oil demand in the USA and will likely face some tough headwinds in 2023 if the recession's threat materializes in H2 2023, which may still be avoided.

Warning: The T.A. chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the T.A. chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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