Valero Energy Stock To Remain Below Its Pre-Covid Peak
4 min read
Close-up of logo for petroleum company Valero Energy in Walnut Creek, California, October 4, 2017. … [+]
Valero Energy Corp stock (NYSE: VLO) currently trades at $56 per share and is still down 41% from the beginning of 2020. Valero Energy Corp is an international manufacturer and marketer of transportation fuels and other petrochemical products. VLO stock traded at $83 in February 2020 just before the outbreak of the pandemic and is still almost 33% below that level as well. The stock has gained more than 70% since its March lows of 2020 compared to the S&P 500 which saw a 66% rise during this period. The stock has slightly outperformed the market due to gradual lifting of the lockdowns and the Fed’s stimulus measures. However, the recent spike in Covid-positive cases, fuel demand not expected to go to pre-crisis levels anytime soon, and the company’s high debt burden are risks associated with the stock. These factors are likely to prevent the stock from seeing a full recovery to pre-Covid levels. We believe that VLO’s stock will see a more modest rise of around 15% from its current level in the near term. Our conclusion is based on our detailed comparison of Valero Energy stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 66% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how VLO stock and the broader market performed during the 2007-08 crisis
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
VLO and S&P 500 Performance During 2007-08 Crisis
We see VLO stock declined from levels of around $62 in September 2007 (pre-crisis peak) to levels of around $18 in March 2009 (as the markets bottomed out), implying VLO stock lost 71% from its approximate pre-crisis peak. However, post the 2008 crisis, the stock lost another 14% in value as it fell to levels of over $15 in early 2010, this is despite the markets seeing a turnaround between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.
VLO Fundamentals Over Recent Years
VLO revenues increased from $75.7 billion in 2016 to $108.3 billion in 2019, primarily due to higher refining revenue. Along with higher revenue, earnings increased from $4.94 to $5.84 during this period. However, the company’s revenues dropped in 2020 with the last twelve months revenues coming in only at $76.2 billion, due to the severe impact of the pandemic on the transportation fuel companies. VLO reported losses of $0.05 per share in the last twelve months with revenues sliding along with lower refining margins and lower ethanol prices and production volume.
Does VLO Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
VLO’s total debt nearly doubled from $8 billion in 2016 to $15.2 billion in Q3 2020, while its total cash decreased from around $4.8 billion to $4 billion over the same period. The company’s cash from operations also went down from $4.8 billion in 2016 to $2.6 billion in the last 12 months. Thus, high debt burden and decline in cash from operations are near term risks that the company faces.
Conclusion
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Valero Energy stock has the potential for modest gains of around 15% once fears surrounding the Covid outbreak are put to rest. A sharp rise in the stock in the near term looks unlikely due to the slow pick-up in demand for transportation fuel, recent spike in Covid-positive cases leading to increase in fear of another lockdown, and VLO’s high debt burden.
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