Valero is a Refined Choice for Energy Investors

11/07/2019 5:00 am EST

Focus: ENERGY

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Valero Energy (VLO) needs no introduction, as it’s one of the country’s leading refiners. The stock is strong because business is good and getting better, with investors turning more bullish on cyclical names, suggests Mike Cintolo, editor of Cabot Top Ten Trader.

The company recently reported an estimate-beating third quarter, with EPS and revenue coming in 9% and 12% higher than expectations, respectively, with management offering soothing words about Q4.

The refining industry had hit a road bump in 2019 as prices on heavy, sour crude oil feedstock rose due to infrastructure and production constraints in Canada and Mexico, OPEC cuts, and Iranian and Venezuelan sanctions, all of which put a lid on profit margins.

Meanwhile, Valero’s 2019 profits are expected to fall 33%. But a huge catalyst is coming in 2020, and consensus estimates now point to 95% earnings growth next year.

That catalyst is IMO 2020, the nickname for the International Maritime Organization’s new mandate that the world’s 39,000 ships and tankers use either scrubbers or low-sulfur diesel fuels in order to minimize sulfur oxide emissions into the atmosphere.

IMO 2020 is going to be expensive for businesses that import or export products across the world’s oceans, and it’s going to be expensive for consumers who purchase those products.

But it’s going to be a windfall for Valero, which will fulfill the demand for low-sulfur diesel fuel and earn good profits from it. Besides the earnings bump, the company’s cash return program is a plus — Valero sports a 3.6% dividend today (should go up with next year’s earnings surge), and it’s been aggressively buying back shares as well.

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