Given the state of things in the oil patch lately, most investors aren’t looking too closely at Valero Energy Corporation (NYSE:VLO), one of the biggest oil refiners in the world. But for contrarian investors, this is definitely the time to look deeper at VLO stock.
The most obvious thing about VLO is its dividend, a solid 4.2% dividend yield at its current price. Any downside the stock may have as energy markets bounce around, simply means that dividend will rise.
But any good contrarian looks beyond the obvious and in this case, it’s that Valero stock has been buffeted by the gyrations roiling OPEC, Russia, non-OPEC producers and the U.S. oil market.
OPEC and Russia decided to keep their production limits in place through the fall, which should have moved oil prices higher. They didn’t. Major industrial nations aren’t using their oil reserves as quickly as anticipated and non-OPEC players like Libya and Nigeria are coming back online, keeping prices low.
Good News for Refiners
This has kept oil prices below $50 a barrel. But it’s what’s happening in the U.S. market that makes for two bullish reasons that this scenario is good news for refiners like VLO.
Reason #1: after oil prices tanked in 2014, U.S. exploration and production (E&P) dried up because most US firms couldn’t pump profitably under $50 a barrel, much less sub-$40. But since then, E&P firms have rebuilt their operations so they can pump profitably into the $40s.
Reason #2: U.S. gasoline exports have taken off in recent months. Even if oil prices make it tough to make money in the fields, the refiners are seeing export demand increase, which is very good news for VLO stock.
As a matter of fact, in its most recent earnings report, VLO noted that refining margins grew to $8.14 a barrel in Q1 this year from $7.66 a barrel last year, . Revenue also came in about 5% above the same quarter last year, also beating estimates.
Bottomline on Valero Stock
The point is, stockpiling crude is not a problem for VLO, since it simply refines what it needs to supply otherwise growing local and foreign demand.
According to the Energy Information Agency, U.S. crude production is up to nearly 1.5 million barrels per day (mbpd) and the agency expects that to grow to 10 mbpd by next year. That only means more market share for American exports.
So, the contrarian doesn’t rely only on oil prices to give a true measure of what’s happening in U.S. fields. Factors below the surface show there are some real opportunities in the oil patch now, for those that look beyond the obvious.
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.
