Comparing Valero’s valuation
In this last part, we’ll compare Valero Energy’s (VLO) valuation with peers’. VLO is presently trading at a forward PE (price-to-earnings) ratio of 13.4x, below its peers’ average of 13.9x. Peers PBF Energy (PBF) and CVR Refining (CVRR) also have below-average ratios, of 12.3x and 11.2x, respectively.
Also, VLO has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 6.4x, again below the peer average of 7.0x. Likewise, PBF Energy’s and CVR Refining’s EV-to-EBITDA ratios are below average. However, Marathon Petroleum (MPC), HollyFrontier (HFC), and Phillips 66 (PSX) have above-average PE and EV-to-EBITDA ratios.
Why the discounted valuation?
Valero’s earnings have been impacted by high compliance costs. For RINs (renewable identification numbers), VLO paid ~$631 million in the first nine months of 2017, and ~$750 million in 2016, around 21% of its operating margin. The cost is forecast to be $750 million–$850 million in 2017.
Therefore, VLO’s below-average ratios could be due to its RIN acquisition burden. RIN prices can be very volatile. For more on RINs, read Gauging the Impact of RINs on Refiners: Bane or Boon? Also, to know about leading American refiners in 3Q17, read How MPC, VLO, ANDV, and PSX Fared in 3Q17?