Last week, Valero Energy Corp. (NYSE: VLO) announced the postponement of a major capex project in Port Arthur, a guidance towards a second quarter loss, and a dilutive stock offering. Basically, a triple whammy that sent the stock tumbling from $22 to $18, a near 18% single day loss.
A lot has been written since about how CEO Bill Klesse and Valero management has mismanaged the business and how this company deserves its well below industry average P/E ratio. The all-knowing Jim Cramer even put Bill on the “Wall of Shame.” Is this all an over reaction or was I wrong about my purchase of Valero earlier in the year? Is Valero not truly a value, but a dreaded value trap?
One positive note with regards to last week’s bomb was that Valero was able to issue shares to the market at $18, establishing a relatively acceptable floor for share value relative to its lows for the year.
The decision to issue shares at $18 per share is, however, a pretty damning data point. Management has bought back nearly $9 billion of shares over the last three years at prices near $60 per share and this most recent offering is all but an admittance that they mismanaged their capital allocations. That being said, a year ago, these moves were being lauded as shareholder friendly and the right way to return value to shareholders. At the very least, we know that management has in the past been shareholder friendly (probably to a fault) during flush times.
As far as operations go, the fact that Valero has managed to lose money due in part to downtime at refining facilities as well as lagging demand for diesel and poor sour crude margins this quarter is worrisome. This will require closer attention going forward, particularly if other refiners show an ability to turn profits over the last quarter. My original thesis on refining was that refined product demand ought to pick up before oil prices and as a result provide a synthetic “long oil” position in my portfolio. Unfortunately, it seems that oil futures have once again run ahead of fundamental demand (at least relative to US demand).
Strategically, I believe Valero is on the right track in this downturn. It has reigned in capex, but continues to look to use its industry leading position to find ways to improve the business’ competitiveness.
