The United States and Iran have inked an interim deal to end the war and eventually reopen the Strait of Hormuz, which is responsible for the passage of significant oil volumes that are consumed across the globe. So, once the oil starts flowing, there will be more supply, leading to declining commodity prices. The price of West Texas Intermediate crude is hovering around the $75-per-barrel benchmark, reflecting a sharp decline from the more than $100 per barrel a month ago.
Although oil prices are still high, the significant decline is definitely having a much bigger impact on the energy business landscape. For refiners like Valero Energy Corporation VLO, the considerable decline in oil prices will likely increase refining margins, as input costs have fallen remarkably.
Apart from this, investors should note that 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 higher refinery activities and constrained fuel supply, refining margins for refiners like VLO are quite strong.
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 falling crude prices and 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 jumped 72% over the past year compared with the 38% improvement of the composite stocks belonging to the industry.
From a valuation standpoint, VLO trades at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 7.25X. This is above the broader industry average of 5.55X.
The Zacks Consensus Estimate for VLO’s 2026 earnings has seen upward estimate revisions over the past seven days.
VLO currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Valero Energy Corporation (VLO): Free Stock Analysis Report
Marathon Petroleum Corporation (MPC): Free Stock Analysis Report
Phillips 66 (PSX): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).