Although 2020 has been a difficult year for those who own shares of energy-related companies, they underperformed the stock market long before COVID-19 lowered energy demand and evaporated stock prices. . In June 2018, shares of Valero Energy Corporation (VLO) hit an all-time high of $ 126.98. Since then, the stock has hit lower highs and lows, hitting a low in March 2020 when selling foreclosed markets across all asset classes. VLO and other energy companies have lagged the stock market on the upside and led the way down during the risk-free period. The stock which traded near $ 127 fell to a low of $ 31, less than a quarter of the high.
Since the March low, the stock market has returned to new highs, but the VLO only hit $ 77.11 in June before falling back to $ 35.44 in October. On November 6, 2020, the stock closed at $ 38.17 and appeared to be heading for a test of the March bottom. Valero is an energy company, but it does not take the price risk of the crude oil it buys or the petroleum products it sells. He buys and sells at market prices. Instead, VLO owns refineries, which require massive capital investments. The profits of VLO increase and decrease with the level of processing or crack spread for refining petroleum into gasoline and distillates.
Dramatic upturn on November 9 shows potential for VLO – Consistently surpassing EPS estimates and a juicy dividend
On November 6, VLO shares closed at $ 38.17 as the number of coronavirus cases in the United States and Europe increased, threatening energy demand as we saw earlier this year. On November 9, Pfizer’s announcement of an effective vaccine in trials boosted VLO’s shares along with many other energy-related stocks.
As the chart shows, the VLO soared on November 6 and peaked at $ 56 on November 16, which is 46.7% above the closing price on November 6. The stock was trading around the $ 50.80 level on Friday, November 20, much closer to the high than the low of the past two weeks.
2020 has been a difficult year for Valero. However, the company has consistently beaten analysts’ forecasts for EPS over the past four quarters.
Source: Yahoo Finance
The chart shows that in Q4 2019, VLO broke analysts’ earnings estimates by 51 cents by declaring $ 2.13 per share. Q1 is generally a weak quarter as gasoline demand experiences a seasonal lull. In the first quarter of 2020, the VLO broke 49 cents with EPS of 34 cents. The T2 and T3 were problematic as the company suffered from the pandemic and its impact on energy demand. However, VLO broke the estimates by 16 and 33 cents in both quarters. Analysts expect VLO to lose $ 1.33 in the fourth quarter, but earnings history points to another outperformance in the last quarter of this difficult year.
A survey of eighteen analysts on Yahoo Finance has an average price target of $ 58.56 per share, with projections ranging from $ 46 to $ 75. At $ 50.80 per share on November 20, VLO’s dividend of $ 3.92 equates to a yield of 7.7%.
Winter months tend to be a bearish time for refining stocks
Gasoline is the most common petroleum product, and the demand for the fuel that powers automobiles declines during the colder months of the year. Drivers are putting fewer kilometers on their cars, which reduces the demand for gasoline. Refineries shift production from gasoline to distilled products as the winter season approaches. Distillates, including fuel oil, diesel, and aircraft fuels, are less seasonal than gasoline. However, 2020 is anything but a typical year as the pandemic continues to weigh on aggregate demand. For the airline industry, declining travel has weighed on demand for jet fuel, which often increases during the holiday season.
We are now at a time of the year where VLO stocks have historically shown weakness.
The monthly VLO stock chart shows that seasonal weakness tends to occur in the fourth and first quarters of the year. In 2020, the coronavirus took precedence over seasonality. Meanwhile, VLO and other refining companies are likely to progress lower and lower with progress on a vaccine and the virus’s tragic toll, causing further lockdowns in recent weeks. The stock market tends to look to the future, and a tool to immunize the public seems only months away as we move towards the end of 2020.
Crack gaps remain under pressure compared to same period last year
Seasonality tends to be a big factor in the propagation of cracks in gasoline. The gasoline refining margin has shown a downward trend and remains below its level of mid-November 2019.
At just over $ 7 per barrel on November 20, the gasoline processing margin is significantly below its level at the same time in 2019, when it traded at a low of $ 10.52 per barrel . Gasoline refining margins are expected to continue to decline due to the downward trend of highs and lows in recent months.
Meanwhile, the spread of crack in fuel oil, which is a proxy for other distillates, has tended to increase since late September, from $ 6.44 to $ 11.60 per barrel. However, at the end of last week, the spread remained significantly lower than its mid-November 2019 level, when it traded at a low of $ 22.27 per barrel.
Levels to watch in crack spreads – the real-time indicator of refinery earnings
Crack gaps are a real-time indicator of the demand for crude oil, which is the main ingredient in the transformation of petroleum into petroleum products. They are also an excellent barometer for the profits of refining companies, as profits rise and fall with processing margins. The gasoline and crack distillate spread levels as of November 20 were well below the levels of the same period in 2019. On November 20, 2019, VLO shares were at $ 97.19, almost double the actual level.
Over the coming weeks and months, the price movement of the treatment spread is likely to provide clues to VLO’s earnings.
As seen in the now active month’s daily chart of the Gasoline Crack Spread in January, near-term technical support is $ 6.39 with resistance at $ 8.29 per barrel. The odds are in favor of a test of the decline, given the seasonality during the winter season and the growing number of coronavirus cases.
The weekly fuel oil processing gap chart shows support and resistance levels of $ 6.44 and $ 12.45, which may provide better insight into refinery revenues due to lower sensitivity to factors seasonal.
Levels to watch in VLO stocks – A vaccine is bullish; winter 2020/2021 could be the last chance to get cheap
I believe VLO stocks offer compelling value for futures at just over $ 50 per share.
The chart shows a spread from November 6 to November 9 between $ 39.90 and $ 44.90 that sticks out like a sore thumb. Price action tends to fill the gaps on the charts over time.
The near-term technical resistance level now sits at the recent November 16 high at $ 56. Above, the July 29 high of $ 59.76 and the June 8 high of $ 77.11 are technical resistance levels. A vaccine is on the horizon, but the darker days of the coronavirus appear to be ahead in the weeks and possibly months to come. We could see VLO stocks pull back and close the gap on the chart. The stock may even fall if the risk-free conditions return to the markets. However, a light at the end of a long tunnel caused by the pandemic is optimistic for VLO. Another sale over the next few weeks and early 2021 could be the last chance to buy VLO at a compelling level going forward. The dividend of more than 7% will pay investors while waiting for capital growth. Even if the dividend were to disappear or the company downgraded the level, VLO continues to offer value at the $ 50 per share level. Buying scale-down when weak might be VLO’s optimal approach.
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Disclosure: I / we have no positions in the mentioned stocks, and I do not intend to launch any positions within the next 72 hours. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose action is mentioned in this article.
Additional Disclosure: The author still has positions in the commodity markets in futures, options, ETF / ETN products, and commodity stocks. These long and short positions tend to change on an intraday basis.