St Charles SEC Unit Will Yield High-Value Products

Key Takeaways

• Strategic investments and a strong balance sheet may boost future earnings through growth and higher-value product yields.
  
• Shareholder returns could improve from increased dividends and buybacks, while renewable diesel segment earnings benefit from market factors.
  
• Asset impairments, renewable segment struggles, operational cost pressures, and regulatory uncertainties threaten Valero's financial stability and profitability.

Catalysts

Manufactures, markets, and sells petroleum-based and low-carbon liquid transportation fuels and petrochemical products in the United States, Canada, the United Kingdom, Ireland, Latin America, Mexico, Peru, and internationally.

• The SEC unit optimization project at St. Charles, expected to start up in 2026, is projected to increase the yield of high-value products, potentially boosting future revenues and earnings.
  
• Anticipated tight product supply and demand balances, with low product inventories, are expected to support refining fundamentals during the driving season, possibly enhancing refining margins and revenues.
  
• A strong balance sheet and $5.3 billion of available liquidity provide Valero with operational and financial flexibility to invest in growth and optimization projects, potentially improving future earnings.
  
• The potential for higher D4 RIN prices and an increase in the RIN obligation could positively impact the renewable diesel segment's earnings by improving margins.
  
• Continued commitment to capital discipline and shareholder returns, such as the 6% increase in the quarterly cash dividend, could support per-share earnings growth through ongoing share buybacks.

Valero Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valero Energy's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $13.76) by about September 2028, up from $760.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.9 billion in earnings, and the most bearish expecting $2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 66.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 1.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Valero Energy Future Earnings Per Share Growth

Risks

• A significant net loss attributed to asset impairments, particularly related to West Coast operations, could negatively impact future earnings and financial health.
  
• The renewable diesel segment struggled with high operating losses, reflecting challenges in maintaining profitability amidst shifting regulatory and market dynamics, thereby affecting net margins.
  
• With the intent to close the Benicia refinery due to stringent regulations, there could be substantial costs related to plant closure, negatively affecting cash flow and future earnings.
  
• Uncertainty around policy changes, such as potential increases to RIN obligations and California LCFS adjustments, introduces risk to revenue stability in the renewable segment.
  
• High operational cost pressures, particularly from maintenance and potential fluctuations in natural gas prices, may constrain margin improvements, thus impacting overall profitability.

Valuation

• The analysts have a consensus price target of $158.333 for Valero Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $181.0, and the most bearish reporting a price target of just $133.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $116.8 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.1%.
• Given the current share price of $161.83, the analyst price target of $158.33 is 2.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.