Valuation of

Company Overview:  The largest independent refiner of crude oil in North America million b/d  One of the US largest retail operators – Valero, Diamond Shamrock, Ultramar, Shamrock, Beacon  Owns and operates 18 refineries in U.S.A., Canada and Aruba  Some of its products: -CARB* Phase II gasoline -low-sulfur diesel -oxygenates*

Product Average/Barriers to Entry  Unique in its production of CARB Phase II gasoline, as well as other materials in line with the requirements of California Air Resource Board (CARB)  Industry leader in upgrading capacity provides superior operational flexibility  Has access to 4,800 miles of pipeline to store and transport crude oil and refined products  Its size allows it to take on risky deals that smaller companies would not have undertaken

 Aggressive Acquisition Strategy: "We are in a race with international oil companies to increase our reserves, one way to increase reserves is by purchasing them. I wouldn't rule out these possibilities."  Scale and lower cost structure

Risk Commodity Price Risk Interest Rate Risk Foreign Currency Risk Market and Credit Risk

Business Plan:  Focuses on the business where the margins are the widest-refining heavy crude oil  Diversification through the two sectors: retail and refining  More consolidation  Gradual shift from a discount gasoline brand to premium brand – Ultramar, Beacon, Total and Diamond Shamrock under the name Valero

Dec. 31 st, 2001Ultramar Diamond Shamrock 4,700 retail sites+ 3,600 miles of pipeline network July, 2003St. Charles refinery March, 2004Aruba refineryAcquisition price- 365 M, operating income for first 10 months-290 M September, 2005Premcor MergerSour crude processing possibilities Some key acquisitions/mergers:

Some key figures: Comparison with the Oil&Gas Index Stock price movement for the past 2 years

Multiples Valuation: Repsol YPF SA (REP) – market capitalization of $34.79B P/E for REP=9.25 EPS for Valero=6.11 (Yahoo Finance)/4.7 (Value Line) P/E(REP)*EPS(VLO)=$56.52/$43.48 Current stock price=59.72  Conclusion: The stock is overvalued

Discounted Cash Flow Analysis:  Calculating WACC: - Cost of Equity (K) 1) Risk Free Rate = 4.697% 2) Beta = ) Market Risk Premium = 6.4% 4) Size premium (according to market capitalization) = -0.15% 5) K = 11.61%

DCF continued…  Calculating WACC: 2) Cost of Debt (R) - actual effective interest rate Interest Expense / LT Debt = 5.16% *(1-0.32)=0.035, or 3.5% 3) Capital Structure: 0.26% Debt, 0.74% Equity 4) WACC = 9.6%

DCF continued…  Long term growth rate: - reinvestment rate = 20% - ROC = 21% - growth = 4%  Price per share = $39.03

Sensitivity Analysis BetaPrice per Share