Valero Energy an Outstanding Play on Refining Industry's Recovery

6/6 - "We are maintaining our Buy recommendation on Valero Energy Corporation (VLO) shares despite the ongoing refining-margin weakness due to high crude oil prices and weak-product demand."

"We believe that high feedstock and operating costs will continue to weigh on near-term margins. However, our long-term view of Valero remains favorable. We also like the company’s recent restructuring initiatives and its track record of returning significant capital to shareholders."

"We believe Valero shares have become extremely attractive. Our unchanged $65 price objective results from 2009 P/E and P/CF multiples of 10.1x and 8.5x, respectively."

6/13 - "In case you’ve never heard the term before, the crack spread is the difference between the price of crude oil and the value of the petroleum products that refiners can make from it. The crack spread can widen or narrow over time, depending upon various combinations of supply and demand...Right now, the crack spread is narrowing. In fact, it has been for some time as governments around the world and gasoline companies actually try to hold down the pain motorists feel at the pump."

"But we can also see another scenario, one that’s very different. Peering into our crystal ball, we can see a situation in which the crack spread begins to widen, and gasoline prices run away anyway - eventually reaching $7 or even $9 a gallon."

"...pressure is escalating globally for countries to end the subsidies the world economy can ill-afford...As I hinted earlier, this change has the potential to jam a lot of consumers personally. But it would allow world markets to function as, well, markets. And that, in turn, would afford investors one of the biggest turnaround opportunities available in the energy sector today. The reason: As the subsidy removals, pricing changes and demand shifts work their way through the global economy, the crack spread would widen again…and fast.

And the biggest beneficiaries could well be the oil refiners, which have seen their profits get zapped along with crack spreads in the past year...If there is a sector turnaround, the upside could be huge. And the three firms in line to benefit are Western Refining Inc., Valero Energy Corp. and Holly Corp."

6/13 - "It is certainly well known by now that WNR is facing serious liquidity issues, but we believe that the market conditions are currently favorable for possible upcoming developments to spark a rally in the stock. Several recent reports indicate that WNR is actively negotiating with both creditors over a possible covenant waiver and Petrobras (PBR-N, NR) as a new crude supplier. While the company’s financial risks remain high, these negotiations indicate to us that WNR’s liquidity issues could ease if these developments come to fruition. As such, we are upgrading our rating from Underperform to Speculative Outperform and increasing our price target from $11.00 to $14.00."

"WNR’s highly leveraged balance sheet has undoubtedly impacted the company negatively, but we believe meaningful operational improvements underlay the current intense focus on liquidity issues. Actual margins in Q1/08 were better than reported after excluding a significant inventory-related loss and a new crude supply contract at Yorktown could improve profitability and stabilize working capital challenges."

"While investing in WNR remains a risky proposition, a somewhat inefficient current market for the company’s shares could limit further meaningful downside. An exceptionally high short interest position on WNR has likely made it difficult to add many incremental shorts given the limited remaining borrow. This situation could effectively place a floor under WNR and elicit massive short covering should any positive news surface."