Valero Energy Corporation (NYSE:VLO) is one of the top refiners in the U.S., so it’s no surprise that VLO stock has been working its way back to its mid-2014 levels.
It was late 2014 when Saudi Arabia and its OPEC allies went after high-cost U.S. shale producers by over supplying oil from its low-cost fields.
This drove down the price of crude, shut down a lot of U.S. production and hurt the domestic oil industry from producers to pipelines to refiners and retailers. And Valero is a major player, so VLO stock faced a lot of volatility over the past few years.
Valero refines about 3 million barrels of oil a day into fuel and 1.4 billion gallons of ethanol a year. Its operations are primarily on the Gulf Coast for oil refining and in the Midwest for its ethanol production. And while most of its business is from the U.S., it also has operations in the Caribbean, Canada and the U.K.
Now that U.S. producers have found ways to lower the costs of their operations, they can now be profitable for $5-$10 cheaper than pre-2014. That’s good news for VLO stock holders.
Add to that the increasing demand as the U.S. economy slowly gets back on its feet. That spells opportunity up and down the energy stream. Usually, the best sense of the health of the U.S. energy patch is checking on the upstream energy players — the exploration and production companies. When they’re working fields and pumping oil, the rest of the system is doing well. And rig counts are again on the rise.
Downstream refiners like VLO benefit from increasing production. Demand for the fuel is the other key component. And that has been slowly coming back as well. In the meantime, VLO has figured out how to increase its free cash flow even while its revenue is down. That’s a pretty impressive feat. It shows that this management team knows how to take the good with the bad.
Bottom Line on VLO Stock
One of the most attractive pieces to VLO at this point, however, is its solid 4.5% dividend. VLO stock may not be in growth mode right now, but it won’t be losing much ground at this point and collecting that dividend is certainly a nice way to pay for your patience.
The U.S. economy is throwing off mixed signals, but the question now isn’t if we’re in a recovery, but how fast that recovery will be. That’s why this is a good opportunity to get into a company that has declined year to date, but is up 14% in the past 12 months.
There’s still plenty of upside left here for VLO in particular and the U.S. energy patch in general. But this is where you want to put patient money. Just don’t expect a turnaround overnight.
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.