Remember 2002? Valero Energy (NYSE: VLO ) was in the dirty, unglamorous business of refining. Well, the near-sevenfold increase to the stock's price since the close of 2002 has turned the ugly duckling that was Valero into a swan. Today, the company is reporting record fourth-quarter and year-end results.
In the fourth quarter of 2005, the company's net income was $1.3 billion -- and $3.6 billion for all of 2005. Fourth-quarter revenue and income exceeded analyst estimates.
It shouldn't come as much of a surprise that there have been acquisitions. There was the 2005 $8 billion purchase of Premcor, immediately accretive to earnings, which made Valero the largest refiner in North America. The company also ventured to bankruptcy court in 2003 to spend $400 million to purchase a large Louisiana refinery from Orion Refining.
To my mind, what separates Valero from its peers is its disciplined approach to business. While the Premcor merger made big headlines, the company was also selling a small refinery just outside Denver to Suncor Energy (NYSE: SU ) . The $30 million sales price was a win-win for both companies. Valero shed a marginal operation, and Suncor was able to combine an existing refinery next door with Valero's facility to gain economies of scale.
Wall Street is yawning today -- the stock was down 1% in late Tuesday morning trading after being bid up 5% Monday on the announcement that it was expecting record results. Fourth-quarter refining results could have been better were it not for the company's Port Arthur facility being shut down for part of October by the hurricanes, and an extended turnaround at Delaware City also had a negative impact. It's ironic that both facilities were part of the Premcor purchase.
Valero is very upbeat about 2006. The potential for extended downtime because refiners have been running at capacity contributes to what might well be the perfect storm for tight gasoline supplies (and high prices) in 2006. Then consider the fact that refiners like Valero have recently reaped the benefits of record spreads between crude and refined fuels, which is a particularly strong positional advantage for Valero. And Valero brings a big heap home, given its capacity to refine heavy sour crude, which typically yields higher spreads.
Before today's blowout earnings number, analysts expected the company to earn $7.53 per share in 2006. That forward earnings multiple of 8.3 compares favorably with the 10.6 and 11.4 at, respectively, BP (NYSE: BP ) and ExxonMobil (NYSE: XOM ) but is below the 7.9 and 6.9 multiples at Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ) .
So on a price-to-peers basis, the company looks fairly priced even though it's just below its 52-week high. Bear in mind as we move forward, though, that its valuation is dependent on continued strength as it goes for spreads on oil, sustained demand, and significant capacity utilization on the part of industry participants.