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Why Does Valero Energy Trade at Higher Valuations?


May. 28 2019, Published 12:10 p.m. ET

Valero Energy’s valuations

Valero Energy (VLO) trades at a forward PE ratio of 9.1x, which is above the peer average of 8.7x. However, Delek US Holdings (DK), HollyFrontier (HFC), and Marathon Petroleum (MPC) trade below the peer average with forward PE ratios at 7.8x, 8.3x, and 8.0x, respectively.

Valero Energy stock trades at a forward EV-to-EBITDA multiple of 5.6x, which is above the peer average of 5.5x. Phillips 66 (PSX) also trades above the peer average with an EV-to-EBITDA multiple at 6.6x. PBF Energy (PBF) trades below the peer average with an EV-to-EBITDA multiple of 5.0x.

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Why Valero Energy trades at a premium

In the first quarter, Valero Energy’s refining earnings fell 41% YoY to $479 million. Marathon Petroleum, HollyFrontier, and Phillips 66 also saw a fall in their refining earnings. Marathon Petroleum posted an operating loss of $334 million. Phillips 66 posted a pre-tax adjusted refining loss of $219. HollyFrontier’s refining adjusted EBITDA fell 4% to $193 million. The first quarter has been a difficult period for refiners.

Despite tougher business conditions, Valero Energy’s net debt-to-EBITDA ratio was 1.2x. The company’s total debt-to-capital ratio was 32% in the first quarter. Both of the debt ratios stayed below the industry average, which is a favorable scenario. The company had adequate cash reserves during the second quarter, which shows its financial strength and flexibility.

Valero Energy focuses on expansion activities to raise its earnings. The company aims for an incremental annual EBITDA of ~$1.2 billion–$1.5 billion by 2022 from the growth projects. Analysts expect Valero Energy’s earnings to expedite next year. Analysts expect the company’s EPS to rise 60% in 2020.

Overall, Valero Energy trades at higher valuations due to its sound financials and growth activities, which hint towards a brighter long-term outlook.


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