The oil and gas boom in the U.S. over the past decade has opened up huge opportunities for many players in the energy industry. Yet although Valero Energy (NYSE:VLO) doesn't necessarily have the most direct exposure to what's been happening in the oil patch in recent years, the refinery specialist has certainly benefited from the rush of cheap crude oil production. Though the stock has seen undeniably extreme swings both upward and downward in the past 10 years, Valero has demonstrated an ability to ride the cyclical tide in energy and still produce a long-term upward growth trajectory. Let's take a closer look at some of the factors that demonstrate Valero's qualities as a blue chip stock among refiners.
Valero stands tall in its industry
Valero Energy is a big player in the refining industry, but it doesn't have a dominant leadership role. Integrated oil giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) have extensive refining operations of their own, and peer Marathon Petroleum (NYSE:MPC) has almost the same market cap as Valero. Yet Valero's revenue of nearly $140 billion over the past 12 months dwarfs that of Marathon and smaller player HollyFrontier (NYSE:HFC), and it's enough to help Valero stand up to Chevron and Exxon as a major player in the industry.
Valero's balance sheet is strong
Given the capital-intensive nature of refining, it's easy for companies in the business to get into trouble with deteriorating balance sheets. But Valero has avoided that trap, with its long-term debt of roughly $5.8 billion as of June 30 representing just 12% of total assets and keeping its debt-to-equity ratio below 30%. Moreover, with cash and equivalents of $3.5 billion, Valero's net debt is even less. Staying lean gives Valero the opportunity to make major strategic moves down the road if it needs to do so to keep growing.
Valero is back in growth mode
The energy industry is constantly volatile, and Valero rode the same wave up and down in 2007 and 2008 that most energy companies experienced. When oil prices plunged from nearly $150 per barrel to below $50, you could see the impact on Valero's numbers, as revenue dropped by 40% from 2008 to 2009. Since then, though, Valero's sales have come back in full force, hitting new all-time levels in 2012 that were more than twice the 2009 figure and sustaining those levels since then despite turbulent performance in the price of crude and various refined products.
On the cash flow front, Valero has also made progress, even though the company has had to spend on capital improvements that have eaten into its growth. After seeing negative free cash flow in 2009, Valero posted $1.3 billion the following year and expanded free cash flow to $3.4 billion last year.
Valero is aiming to become a bigger player in the dividend stock arena
One area in which volatility has had a huge impact is in dividends, where Valero has seen payouts all over the map in the past decade. After rising fivefold from 2004 to 2008, Valero slashed its dividend by two-thirds in 2010. Since then, though, Valero has restored its lost dividends and then some, with the most recent $0.275 per share payout representing a yield of more than 2% at current share prices. That's not enough to put Valero in the same league as Chevron or ExxonMobil, and even HollyFrontier has a higher yield. Still, with the pace of dividend growth in the recent past, Valero is staking its claim as a possible blue chip dividend stock.
The biggest opportunity for Valero
Valero's recent success has largely stemmed from relatively low domestic crude prices that allow Valero to obtain feedstock for its refineries at cheaper prices and then reap profits from selling higher-priced refined products like gasoline and diesel fuel on the world market. With threats like the potential opening of crude oil exports from the U.S., Valero needs to stay on its guard to protect its competitive advantage. Nevertheless, as long as crude flows from U.S. wells, Valero will stand ready to take advantage of the nation's energy reserves to produce profits for its shareholders.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.