Shares of this oil refiner have perked up a bit lately; it still has a high dividend yield of 9.62%, paid quarterly and is in a renewable diesel joint venture.
Valero Energy Corporation (VLO)
From Sound Advice
Valero Energy has been maintaining the dividend. Management says that it wants to continue to maintain the dividend. However, such a high yield reveals that the market believes the dividend will be reduced and current cash flows do not support the dividend. If, and more likely when, the company reduces the dividend, it is not likely to cause a substantial adverse reaction in the stock price because it is already expected.
Valero has the flexibility to refine substantial quantities of a variety of crude oil types. The company also has access to the US pipeline network for delivery to its gulf coast locations. This flexibility and access allows Valero to capture the highest margins among its competitors because it can take advantage of the temporary local gluts of crude, whether it’s low or high-quality crude, or light sweet (low sulfur) or heavy sour (high sulfur), and receive the best discounts for its feedstocks.
Declining oil prices adds profits to petroleum-based products because profits come from the “crack-spread”, the difference between the cost of oil as a feedstock and the price of refined products, predominantly gasoline and jet fuel. A lid is bound to be kept on oil prices for the foreseeable future as major oil producers compete for their portions of the petroleum market, including OPEC nations, Russia, and US frackers.
Valero is in a joint-venture partner with Diamond Green Diesel, which is producing renewable diesel at large profitable margins even during the COVID-19 pandemic. Renewable diesel is made from animal or plant waste material which reduces greenhouse gas emissions up to 80% because it only releases as much carbon dioxide that the material originally contained. Renewable diesel does not gel at low temperatures which means it can be easily transported through pipelines. Use for sustainable aviation fuel is expected to be a primary escalating demand factor.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, September 30, 2020