For oil and gas companies, there's nothing more important than reserves, rigs, submersibles, and refineries. However, to be truly valuable, these assets must be capable of generating profitable returns.
Value for money
It makes little sense for a refiner to have a number of refineries that it can't utilize to full capacity. The non-utilized capacity will still run up the bills (known as idling costs) without any increase in throughput volumes. In short, you have to understand how valuable these refineries are to the company. Today, we'll take a look at Valero Energy
To help evaluate this, we can look at some important metrics:
- Return on assets, or net income divided by total assets, indicates how efficiently the company generates profits for every dollar of assets it owns. A higher value indicates that the assets are more valuable. The metric is pretty useful when used as a comparative measure -- against peers and the industry in general. Typically, ROA for Valero's peer group in the refining and marketing industry is about 7.6%.
- Fixed-asset turnover ratio, or revenues divided by total fixed assets, indicates how efficiently the company's refineries are generating revenues. The higher the turnover rate, the better. For these companies, a value above 5.0 times looks pretty good.
- Total enterprise value/TTM EBITDA shows how expensive the company looks when compared against its trailing-12-month earnings before interest, tax, depreciation, and amortization.
This is how Valero stacks up against its peers:
Return on Assets (TTM)
Fixed-Asset Turnover Ratio
Gross Margins (TTM)
Source: S&P Capital IQ; TTM = trailing 12 months.
Valero doesn't seem to generate the best returns compared with some of its peers. While its fixed-asset turnover ratio is above the industry average, its ROA, at 5.8%, is less than the industry average. The value is also less than the company's historical average of 6.7% since 2006. While Holly's ROA is a massive 15.7%, Marathon also beats the industry average at 9.4%.
HollyFrontier, Marathon, and Western have refineries in the mid-continent region and enjoy higher margins thanks to their proximity to Cushing, Okla., the delivery point of West Texas intermediate crude oil. Because of the oil glut in Cushing, this blend of crude oil has been trading cheaper than Brent crude, aiding gross margins. While Valero has that advantage, the company's Gulf Coast refineries have been a drag on margins.
Valero is planning to suspend operations at its 235,000-barrels-per-day Aruba refinery by the end of this month. Without access to cheap natural gas, which is used as feedstock, the Caribbean refinery has been dragging down gross margins at Valero's Gulf Coast refineries. The move should help cut costs and also improve capacity utilization. Valero's capacity utilization in 2011 stood at 92%, which means there's room for more crude oil to be processed.
Given that its asset utilization is much lower than peers', Valero looks more expensive compared to its peers with its total enterprise value a little more than four times its EBITDA. Valero needs to work harder in order to generate higher returns. Although assets generally indicate how oil and gas companies have been faring in terms of operations, this isn't the only criterion you can use.
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