1. Valero Energy Corporation (VLO)
Energy Sector

2. Ⅰ. Business overview

3. Business Overview
Name: Valero Energy Corporation(1997)
Symbol: VLO(NYSE)
Founded: 1981 (Named after Valero Refining and Marketing Company)
Headquarter: San Antonio, TX
Employee: 10,007 (2014.01.31)
• Valero have 16 petroleum refineries, which are located in the United States
(U.S.), Canada, the United Kingdom (U.K.), and Aruba.
• Product: Gasoline, diesel fuel, low-sulfur diesel fuel, ultra-lowsulfur diesel
fuel, jet fuel and other refined products
• Creating an independent public company named CST Brands, Inc. in 2013
• Created publicly traded Valero Energy Partners LP (NYSE: VLP), a traditional,
logistics MLP with 100% fee-based revenues in 2013

4. Business Segments
Refining Segment
-The World’s largest independent refiner:
 Including refining operations, wholesale marketing, product
supply and distribution, and transportation operations in the
U.S., Canada, the U.K., Aruba, and Ireland.
Retailing Segment
-CST Brands, Inc. (CST)
 Brands include Valero, Ultramar, Texaco, Shamrock,
Diamond Shamrock, and Beacon
Ethanol Segment
-One of the largest renewable fuels companies :
 Including sales of internally produced ethanol and distillers
grains

5. Valero’s Geographically Diverse Operations

6. II. Industry Overview

7. Porter's Five Forces Analysis
• Threat of New Entrants
Low. Set up a new utility business need long time and high cost
• Power of Suppliers
High. Dominated by a small handful of companies
• Power of Buyers
Low. Rate changes for gas or electricity are regulated
• Availability of Substitutes
Low. Transmission and distribution dependence on rail, pipelines
• Competitive Rivalry
Low. Existing utilities are geographic monopolies, lack a rival firm

8. Competitive Analysis
TICKER VLO MPC PSX Industry
Market Cap $25.59B $24.48B 42.19B 3.37B
Revenue 139.14B 95.04B 158.62B 9.11B
Gross Margin 0.05 0.06 0.12 0.07
Operating Margin 0.03 0.03 0.01 0.02
Net Income 3.08B 1.84B 3.05B N/A
P/E 8.66 14.24 14.97 14.81
P/S 0.19 0.27 0.27 0.33
EPS 5.6 6.16 6.38 1.46
High Net Income
Low P/E and P/S
VLO - Valero Energy Corporation,
MPC- Marathon Petroleum Corporation
PSX - Phillips 66

9. Industry Comparison
Tow year stock performance comparing with PSX, MPC and XLE(Benchmark).

10. Ⅲ. Financial Analysis

11. Profitability
• All features have
upward tendency,
especially from 2009
to 2012.
• In 2013, revenue and
gross profit margin
drop a little.
Source: Bloomberg
64,599
82,233
125,987
139,250 138,074 139,143
-1,000.00
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
0.00
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
120,000.00
140,000.00
160,000.00
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Current/LTM
In Million
Gross Profit EBITDA Net Income Revenue
2.3
3.7 3.9
4.6
3.6 3.72.8
4.1 4.1
4
4.1
4.5
-0.4
1.1
1.7 1.5
2
2.2
-1
0
1
2
3
4
5
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Current/LTM
Gross Profit Margin EBITDA Margin Net Income Margin

12. EPS
• Diluted EPS reflects the issuance of stock for all outstanding options,
warrants and convertible securities that would reduce earnings per share.
• Great growth to 2011,and then go steadily.
-3.67
0.57
3.67 3.75
4.97
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Dollar Diluted EPS
Source: Bloomberg

13. Liquidity-Efficiency
• Liquidity analysis focus on cash flow and measures a company’s ability to
meet its short-term obligations.
• These three ratios have nearly same tendency: volatility in 2010 and 2011
and then grow steadily.
0.11
0.38
0.08
0.14
0.33
1.4
1.54
1.26
1.38
1.47
0.59
0.9
0.77
0.83
0.99
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Cash Ratio Current Ratio Quick Ratio
Source: Bloomberg

14. Solvency-Leverage
• Assets/equity -financial leverage ratio always go stable.
• Other three ratios slightly go up in 2010,and go down steadily.
2.31 2.46 2.56 2.53 2.45
50.25
55.49
47.07
38.96
32.9133.45 35.69
32.01
28.03
24.76
20.8 22.16
18.09 15.85 13.89
0
10
20
30
40
50
60
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
%
Assets/Equity Debt/Equity Debt/Capital Debt/Total Assets
Source: Bloomberg

15. DuPont Analysis
• Obviously, profit margin is the main strength to affect ROE.
-0.93
6.04
13.34 12.33 12.82
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Profit Margin
Asset Turnover
Leverage Ratio
ROE
Source: Bloomberg

16. Performance in 2014 Q1&Q2
In Million Q1 2013 Q1 2014 Q2 2013 Q2 2014 Q1 Change Q2 Change
Revenue 33,474.0 33,663.0 34,034.0 34,914.0 0.56% 2.59%
Gross Profit 1,406.0 1,510.0 1,095.0 1,255.0 7.40% 14.61%
Operating
Income 1,061.0 1,350.0 805.0 1,085.0 27.24% 34.78%
Net Income 654.0 828.0 466.0 588.0 26.61% 26.18%
EBITDA 1,491.0 1,771.0 1,210.0 1,499.0 18.78% 23.88%
Source: Bloomberg

17. Ⅳ. Valuation

18. Valuation-Recent Dividend
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.145
0.19
0.3
0.48
0.57
0.6
0.47
0.51
0.65
0.85
Dividend Paid From 2004 to 2013

19. Valuation- Dividend Growth Rate
Average Dividend Growth Rate =
24.22%

20. Valuation-DDM
• Beta = 1.68
• Expected Return of Market= 16.61%
• Risk Free Rate (10-Year Treasure) =
2.32%
• Expected Return of VLO = 26.32%
• Dividend Growth Rate = 24.22%

21. Valuation-DDM
Estimated Price of VLO = $64.84

22. Ⅴ. Risk Analysis

23. Risk Factors
• Volatile Refining Margins
• Uncertainty and illiquidity in credit and capital markets
• Environmental Laws and Regulations
• Disruption of the ability to obtain crude oil
• Interruptions of supply and increased costs
• Competitors that have a competitive advantage

24. Volatile Refining Margins
• Refined product prices & Crude oil and other
feedstocks prices
• Economic turmoil and political unrest
• Additional refinery conversion capacity
 Mitigate:
Reduce operating cost, adjust supply of product and
upgrade portfolio assets

25. Uncertainty and illiquidity in
credit and capital markets
• Affect flexibility to react to changing economic and business
conditions
• Business counterparties, such as Lenders and Customers,
may fail to meet their obligations
 Mitigate:
Maintain investment-grade ratings on senior unsecured debt by
Standard & Poor’s Ratings Services(S&P)
Moody’s Investors Service (Moody’s)
Fitch Ratings (Fitch)

26. Environmental Laws and Regulations
• More stringent environmental laws and
regulations
• New environmental laws and regulations are
continuously being enacted or proposed
 Mitigate:
Keep an eye on the latest laws and regulations and
adjust the operating strategy appropriately

27. Summary
Reasons to invest
-Diversified businesses
-Steady growth of operations
-Strong cash flow
-Focus on safety and reliable
-Good credit rating
Ticker Recommendation Shares Current Price Price Target
VLO Buy 100 $49.49 $60