Valero on Diesel Spree - Analyst Blog

Valero Energy Corp. (VLO) announced that it will build two hydrocracker units. The company has revamped its plan to build two such units at its refineries in Port Arthur, Texas and St. Charles, Louisiana, at a total cost of $2.9 billion. The hydrocracker units will remove sulfur during the refining process and help the company to produce more diesel.
 
The largest U.S. independent refiner had kept this plan on hold during the downturn due to weak demand and poor refinery margins. The company now believes that the scenario is slowly improving with growing demand, especially for diesel, which fuels commercial trucks and ships.
 
Valero expects the Port Arthur project to be completed by the fourth quarter of 2012, at a cost of $1.5 billion. The St. Charles hydrocracker should be completed by the fourth quarter of 2013, at a cost of $1.4 billion. The company will likely use its cash balance to build these units.
 
The refining industry faced significantly weak margins last year. However, padlocking of excess capacity by refiners worldwide and growing demand are now helping industry players to experience a gradual turnaround. This scenario has also been reflected in the company's second quarter results that swung to profit after four consecutive quarters of loss.
 
Valero has recently raised capital budget for the next year by $300 million and expects $100 million in pre-tax savings this year through cost-cutting measures.
 
We like the company's continuous endeavors to review its refining portfolio for a better business mix. Valero remains our favored stock in the refining space for its sound balance sheet, better liquidity and solid assets base. We are currently Neutral on Valero with the Zacks #3 Rank (Hold).