The one thing that you can be sure of is that quality energy stocks in the oil patch will not only make it through oil’s current pricing and economic problems, but they will once again thrive. And Valero Energy Corporation (NYSE:VLO) is a perfect example. When you’re buying stocks with dividends, you aren’t buying them to trade them. There’s no point in buying something like VLO stock, which has a solid dividend, and then jumping out of it before you can build off that dividend.
And no sector is more emblematic of that investing concept then top-quality energy companies like Valero.
VLO is the world’s largest independent refiner and that has not been something to brag about in recent months. A glut of oil caused by slow global economic growth and Saudi Arabia dumping oil into the market has meant that not only are there few markets where demand is improving, but prices are still so low that margins are hurt.
VLO Stock Provides an Excellent Opportunity
That has hurt Valero stock over the last year. The stock is down 16% in the past 12 months. But in support of my observation about the long-term, VLO stock is up more than 170% over the past 5 years. That’s a greater than 30% annualized gain over that time, including the last two years of oversupply and low prices.
But Valero’s recent loss is investors’ opportunity. VLO stock is now cheap and it’s throwing off a very respectable — and stable — 4.5% dividend yield. Valero stock is not one to dump on its slump; it’s time to buy it at a discount.
VLO is not only the largest oil refiner, serving 44 states, six eastern Canadian provinces, the United Kingdom, Ireland and the Caribbean, refining up to 3 million barrels a day, but it’s also one of the world’s largest ethanol makers, producing up to 1.4 billions gallons per year.
Essentially, ethanol is the cheapest octane booster in the market. It’s also relatively clean burning, which helps clean up some of the more environmentally challenged countries that don’t use low-sulfur diesel or use 100% petrol blends.
And that was borne out in 2015, when U.S. demand was down across the boards, which for VLO meant less refining and less distribution and foreign demand in ethanol to boost octane and meet new emissions standards was very strong. This trend is likely to be more long-term than short-term, since many nations are now seeing the need to curb emissions as more vehicles hit the road.
In 2014, production of ethanol nearly hit the 1.3 billion gallon mark and in 2015 the trend pushed production close to 1.4 billion gallons. This trend has been gathering significant steam in the past decade when demand went parabolic.
While it would be overly optimistic to say oil is in rebound mode, it would be safe to say that this is a good opportunity to buy Valero stock for the long-term. And even in these tough times, it’s good to know that VLO has the lowest cost-per-barrel than any of its competitors.
Earnings will be out later this month for Q3. In Q2, VLO surprised by announcing earnings that were 37% better than the same quarter 2015. And revenue grew significantly year-over-year as well.
This is a prime opportunity to establish a position on Valero stock because if earnings for Q3 come in like Q2, it is going to take off.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
