Is Valero’s Leverage Position Sound?



Valero’s leverage compared to peers

So far, we have discussed Valero Energy’s (VLO) stock performance, analyst ratings, refining margin trends, and outlook. In this part, we will examine the company’s leverage position.

Valero’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 0.4x in 4Q15. This is lower than the industry average ratio of 1.1x. Everything else being equal, a lower ratio typically signifies a healthier leverage position and a better capacity to repay debt.

The industry average considers 11 American refining companies, including Marathon Petroleum (MPC), Tesoro (TSO), and Phillips 66 (PSX). This ratio shows a firm’s leverage position as a multiple of its earnings.

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In 4Q15, VLO’s total debt-to-capital ratio stood at 25.7%. This is below the industry average of 35.3%. The debt-to-capital ratio shows a firm’s leverage position and capital structure.

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Valero’s net debt-to-EBITDA trend

Valero’s net debt-to-adjusted EBITDA ratio remained at the same level in 4Q13 and 4Q15. Before analyzing the ratio, let us understand the net debt position.

Valero’s net debt has risen from $2.2 billion in 4Q13 to $3.3 billion in 4Q15. This was led by a rise in total debt coupled with a fall in cash reserves. Total debt rose by 12% over 4Q13 to $7.4 billion in 4Q15. Cash reserves fell by 4% over 4Q13 to $4.1 billion in 4Q15.

Valero’s (VLO) adjusted EBITDA rose during 4Q13–4Q15 due to higher earnings in the refining segment. The rise in adjusted EBITDA coupled with an equivalent rise in net debt resulted in the same net debt-to-adjusted EBITDA multiple in 4Q13 and 4Q15.

Valero’s leverage ratios are lower than its peers, placing VLO in a likely comfortable leverage position.


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