David Park Ryan Ranson Valero Stock Analysis

Investment Thesis “Valero Energy Corporation appears to be an attractive investment opportunity based on its low valuation and its dominant position in the refining and marketing industry. Valero’s size and expertise in refining allow it to have the lowest operating cost per barrel, giving the company a significant advantage over other refiners. The company’s ability to refine cheaper feedstocks also helps to increase refining margins and thus profitability. Although the industry is expected to experience slow growth in the future, Valero’s strong fundamentals will allow it to return capital to investors through dividend growth and stock buybacks. In addition, any reversion to historical relative valuation measures will provide investors with superior capital gains. “

Industry Overview Drivers of profitability Porter’s 5 forces Refining margins Per barrel cost reduction Refining capacities Porter’s 5 forces Threat of entry: Low Power of suppliers: Medium Power of buyers: Low Threat of substitutes: Medium-High Competitive rivalry: Low-Medium

Valero Summary

Valero Summary What makes Valero different? Lowest operating expense per barrel

Valero Summary What makes Valero different? Capability of refining cheaper feedstocks

Valero Summary Economic engine Value proposition Profit per barrel refined Value proposition Refining at a lower cost Current operating environment Goodwill writedown in 4th quarter 2008 Net income adjustment in analysis Issued debt in 1st quarter 2009 Reducing capital expenditures for 2009 Agreement to buy 5 ethanol plants

Key Risks Volatile refining margins Addressed in sensitivity analysis Government/environmental regulations Supply of crude oil Refinery interruptions Integrated oil & gas competitors Continued economic downturn Pressure on margins

Relative Valuation

FCFE Valuation

Sensitivity Analysis

Critical Issues Refining margins Operating cost per barrel Out of Valero’s control, but helped by sour crude Operating cost per barrel Already a leader but current levels are high historically Utilization rates/capacity Do not necessarily need to expand but cutting capacity will reduce profitability

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