1. David Park
Ryan Ranson
Valero Stock Analysis

2. 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. “

3. 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

4. Valero Summary

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

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

7. 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

8. 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

9. Relative Valuation

10. FCFE Valuation

11. Sensitivity Analysis

12. 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

13. Questions?