When I suggested In December 2006 that Valero Energy (NYSE: VLO) would be a smashing investment in 2007, I looked great as it rose from around $50 to almost $80 per share. When I stuck with it, recommending it for 2008, I got sandbagged big time as it sank from a 52-week high of $73.68 to a recent low of $14.59.Valero was trapped by rapidly rising crude prices and shrinking margins on the refined product. However, in the last quarter it was able to show a year-over-year increase in profits.
VLO reported third quarter 2008 income from continuing operations of $1.2 billion, or $2.18 per share, which compares to $848 million, or $1.34 per share, in the third quarter of 2007. The third quarter 2008 results include the company's pre-tax gain of $305 million on the sale of its Krotz Springs, Louisiana refinery to a subsidiary of Alon USA Energy, Inc., which was effective July 1, 2008. Excluding this gain, third quarter 2008 income from continuing operations was $982 million, or $1.86 per share.
This morning the company said it planned significant turnarounds in 2009, with projects planned at two of its Texas refineries. The company also said it had scaled back capital spending in 2008 and 2009 by deferring projects until 2010 and 2011. "As it turns out, 2009 should be a more significant year for turnaround activity," said Chief Operating Officer Rich Marcogliese.
It does not seem hard to believe that VLO will see better times in 2009, with widening profit margins being assisted by lower crude prices and cost-reduction plans already in play. If the increase in oil prices hurt margins, then the decrease will likely bring relief.
Near its 52-week low, with a P/E under four and trading close to book value, I think the negativity on this stock is way overdone. I owned it last year. Bought more this year and have an open order as I peck away at the keyboard. I have no crystal ball on my desk but I would still say investors should be looking at Valero for its sizable upside potential. It closed yesterday at $15.11.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: I currently own shares of VLO.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
