The Iran-war shock is driving the high crude oil prices, with the price of West Texas Intermediate (“WTI”) crude currently trading at more than the $90-per-barrel mark. The U.S. Energy Information Administration (“EIA”) in its latest short-term energy outlook projected WTI at $85.68 per barrel this year, higher than $65.40 last year. Thus, with oil prices likely to remain elevated, refiners like Valero Energy Corporation VLO could see pressure on their overall business. However, that does not appear to be the case. Let’s delve deeper.
The global refining capacity is constrained, and fuel inventories are low. On the demand side, gasoline, diesel and jet fuel remain resilient. This means people are still driving and flying quite often, while diesel demand suggests transportation, freight, agriculture and industrial activity are still holding up. As a result, with busy refineries and fuel not in abundant supply, refining margins for refiners like VLO are quite strong.
Thus, surprisingly, with crude prices likely to remain high, investors shouldn’t allocate their money only to exploration and production companies but also to refining players like VLO, even though high crude prices have been increasing refiners’ input costs.
Will MPC & PSX Also Gain?
Marathon Petroleum Corp. MPC and Phillips 66 PSX are two other leading refining companies that are well poised to gain from the tight refining capacities across the globe.
MPC runs refining systems that are the largest in the United States. With high utilization of refineries, Marathon Petroleum is well-positioned to capture almost all of the available profitable opportunities.
Phillips 66’s refineries have excellent processing capacity and can handle different grades of crude, and hence can earn a handsome margin after processing low-cost heavy crude. Importantly, PSX expects its refining operations to be responsible for contributing almost 33% of its total adjusted EBITDA by 2027.
VLO’s Price Performance, Valuation & Estimates
Shares of VLO have gained 106.1% over the past year compared with the 61.5% improvement of the industry.
From a valuation standpoint, VLO trades at a trailing 12-month enterprise value to EBITDA of 7.95X. This is above the broader industry average of 5.95X.
The Zacks Consensus Estimate for VLO’s 2026 earnings has seen upward revisions over the past 30 days.
VLO currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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This article originally published on Zacks Investment Research (zacks.com).