In the last year, wall street has seen high growth in energy transition stocks particularly with renewable energy such as solar and electric vehicles (EV).
Additionally, with over 60% of the US population having received a Covid-19 vaccine, US reopening stocks have performed admirable.
Are there more stocks that can ride both of these macro market trends?
Consider Valero, a traditional oil & gas industrial poised to succeed in a reopening economy, but also a formidable contender making significant investment in the emerging renewable fuels sector.
Valero Energy Corporation (VLO) produces and supplies transportation fuels and petrochemical products to the international marketplace.
The company was founded in 1980 as a spinoff of a midstream pipeline company. In the 1990s through early 2000s, Valero, went through a strong period of acquisitions allowing them to eventually claim the title of the largest merchant refiner in the world - with assets in the US, Canada, and UK and a supply chains that extend to Ireland, Mexico, and Peru (Valero Energy Corporation, 2021).
In the short-medium term (6-12 months) reopening of businesses and consumer appetite will drive fuel demand.
Oil prices have also been strong the past few months. Keep in mind that in the short-medium term there may be a lag in consumer mindset that will take time to shift back to pre-covid-19 levels of travel and leisure activities.
In the medium term (1-3 years) more countries are adopting carbon credit regulations that allow buying and selling of carbon credits. This is distinctly different than the previous government tax incentives/rebates because these credits can now be bought and sold to those participating in the cap & trade program creating large opportunities for early adopters of the program.
This could play well into Valero’s outlook.
Valero’s main lines of business include transportation fuels, renewable transportation fuels, ethanol, and petrochemical products.
High growth in renewable transport fuels is a key differentiator for Valero who has proven track record of quickly adapting to regulations. In the US, with the ratification of RFS in 2005, Valero was one of the first refiners to diversify into ethanol and softening the blow of expensive RINs credits on the order $100M per annum, with the additional revenue opportunity to sell California LCFS credits, Valero was again one of the first producers of renewable fuels.
Valero is at least three years ahead of the competition with LCFS credit profits in the $100M range (Valero Energy Corporation, 2020)
VLO may not rank in the top in terms of financial metrics, but again the industry has been impacted significantly with most refiners cutting production.
Compared to its historical performance, the current metrics are at all-time lows which provides an excellent buying opportunity. At this point in time, it appears Valero has weathered the economic headwinds of the coronavirus pandemic, is above average compared to the industry.
Energy transition risk is of concern in the oil and gas industry especially with significant stimulus in the renewable energy sectors - predominately electrification.
However, the technology for mass deployment of renewable electricity production and electrification of all light fleet vehicles is unlikely to take-off in the near future. While Tesla is a profitable leader in the electric vehicles (EV) space, this expectation has been blown out of proportion by wall street with the numerous EV SPAC companies with sky high valuations and zero sales.
Valero offers an interesting alternative to straight EV or battery plays.