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Valero’s Valuation Is Higher than the Peer Average

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Valero’s valuation

Valero Energy (VLO) is trading at a forward PE of 10.5x, higher than the peer average of 9.8x. Delek US Holdings (DK), HollyFrontier (HFC), and Marathon Petroleum (MPC) are trading below the peer average at forward PEs of 8.2x, 9.4x, and 9.0x, respectively.

Valero stock is trading at a forward EV-to-EBITDA (enterprise value-to-EBITDA) ratio of 6.3x, again above the peer average of 5.8x. Phillips 66 (PSX) is also trading above the peer average at an EV-to-EBITDA of 6.8x. However, PBF Energy (PBF) is trading below the peer average at an EV-to-EBITDA of 5.1x.

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Why Valero is trading at a premium

Valero has been growing stronger via its robust financials and expansion activities. In 2018, Valero’s earnings surged due to higher refining and logistics earnings and lower renewable identification number expenses. Further, Valero’s net debt-to-EBITDA ratio stood at 0.9x, and its total debt-to-capital stood at 29% in the year. Both debt ratios held below the industry average—a favorable scenario showcasing Valero’s financial strength and flexibility.

Valero is focusing on growth activities to increase its earnings. It expects to incur capex of ~$1 billion annually on growth projects until 2021. Valero plans to spend equally between the Refining and Logistics segments. In 2019, Valero’s capex is expected to be ~$2.5 billion, $1.0 billion of which will go toward growth projects and the rest of which will go toward sustenance projects.

The company aims for an incremental annual EBITDA of ~$1.2 billion–$1.5 billion from its growth projects by 2022. Wall Street analysts expect Valero’s earnings to accelerate next year. They also expect the company’s EPS to rise 58% in 2020.

Overall, Valero is trading at a premium valuation, perhaps due to its sound financials and growth activities, which hint at a bright outlook.

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