Value Investing Bill Ackman on Farnam Street |
- Bill Ackman on Farnam Street
- TCI Fund Management Letter to Wirecard
- Open Square Capital Q1 2020 Commentary
- VLO Long Idea
- The Big China Short
- Portfolio Allocation
- Katina Stefanova Claims a $1 Billion Investment in Marto Capital. Is It Real?
| Posted: 28 Apr 2020 04:48 PM PDT |
| TCI Fund Management Letter to Wirecard Posted: 29 Apr 2020 02:03 AM PDT |
| Open Square Capital Q1 2020 Commentary Posted: 28 Apr 2020 01:58 PM PDT |
| Posted: 28 Apr 2020 01:41 PM PDT Here's a quick overview of Valero Energy Corporation (VLO). Shares of the ~$20 billion market cap oil refiner are down nearly 40% YTD. The stock is a victim of both the broader energy sell-off (though crude oil is an input cost for the company) and the market's current inability to look past a temporary dip in earnings. As the US economy recovers, though, VLO shares have ~60% upside potential over the next two to three years. FYI, the company is announcing earnings tomorrow, though they already released preliminary Q1 results earlier this month. Near-term guidance, if provided at all, is expected to be terrible. The next couple of quarters, though, are no indicator of the business's long-term cash flow potential. Please keep in mind that the below overview is just a starting point for research and not an investment recommendation. --------------------------------------------- Valero Energy CorporationValero (VLO) is one of North America's largest petroleum refiners. The company manages 15 refineries (~3.15 million barrels per day of capacity) in the US, Canada, and the UK. Additionally, the Company has ethanol and renewable diesel operations. VLO sells its products to wholesalers and bulk end-users (railroads, airlines, utilities, etc.). Industry OverviewPetroleum refineries turn crude oil into products such as gasoline, jet fuel, diesel, heating oil, and propane. Valero provides a detailed overview of the process in a presentation on its web site. In the US, the industry is highly fragmented, though the top 11 players make up 75% of capacity. Valero's market share is ~12%, per the EIA. Barriers to entry are high due to large upfront capital costs and strict environmental regulation. Refining EconomicsProfitability is primarily determined by the margin between refined petroleum product prices (e.g., gasoline, heating oil, jet fuel) and the price of crude oil. While refining margins bounce around from year to year, the long-term trend has been stable. At the end of 2019, the 3, 5, 10, and 15-year median refining margins for Valero were ~$10 per barrel. During this period, WTI crude oil traded below $30 and above $145. Though this wide trading range creates margin volatility, profitability eventually "regresses to the mean" of ~$10 per barrel as refined products' prices follow crude oil prices. VLO's 15-year refining margin is charted below. The volume of output from Valero's refineries, or its "refining yield" (refining output in thousand barrels per day), has been consistent with the exception of the Global Financial Crisis (GFC). Below are the last fifteen years of VLO's refining yield. Impact of COVID-19The economic shutdown has made business difficult for refiners. Though crude oil prices have hit multi-decade lows, gasoline and jet fuel prices have dropped even faster. This S&P note discusses the recent phenomenon of very low and even negative crack spreads (the price differential between a barrel of crude oil and the petroleum products refined from it). With Americans staying home and airplanes grounded, volumes have plummeted. Wall Street estimates for VLO's 2020 EPS are now negative after beginning the year at $9.79. Valero filed a business operations update on April 13. The company estimated its Q1 adjusted EBITDA was between $380 and $820 million (Q1'19 EBITDA was ~$860m). It concluded with the following:
The company also disclosed a new $875m credit facility, giving it $5.1bn of borrowing capacity in addition to the ~$1.5bn of cash on its balance sheet. On the following day, VLO announced that it raised $1.5bn through two sub-3% coupon bond issuances. Getting Through COVID-19Though VLO has warned investors about its near-term results, the company clearly has sufficient liquidity to get through the current economic shutdown (annual maintenance CapEx is less than $2bn, SG&A is ~$900m, interest expense is ~$500m, and no big bond maturities for several years). Also, the recently announced credit facility and bond issuances demonstrate the company's ability to raise more low-cost funding if necessary. That being said, with the reduced volume and margins experienced by all US refiners, a dividend reduction is inevitable. This will only be temporary, though. While margins and volumes are currently suffering, Americans will eventually drive cars and fly on airplanes again. Once demand normalizes, there is no reason to assume that VLO refineries won't once again yield ~3,000 MBbls/day at a ~$10/barrel margin as shown in the charts in the above Refining Economics section of this email. Dividend HistoryOver the past two decades, Valero has increased its dividend nearly every year, with the GFC being a lone exception. Dividends per share (DPS) growth has primarily been driven by an increasing payout ratio and share reductions. The first two quarterly dividends of 2020 were each $0.98, or an annual run-rate of $3.92. Given the current state of refining economics, expect a severe but temporary reduction that will last at least a few quarters. The company's impressive 20-year dividend history is charted below. ValuationAs discussed above, refining margins are volatile in the short-term. Consequently, EPS bounces around quite a bit on a year-to-year basis and is not the best indicator of steady-state profitability. Dividends, which have consistently grown (outside of the GFC), are a better proxy for steady-state cash flow available to shareholders. In 2016, VLO significantly increased its payout ratio, beginning a trend of distributing over half of its earnings as dividends. The stock's NTM dividend yield since then is charted below through February 19, which is when the US market began to react to COVID-19. The median yield was 4.2%. Based on VLO's run-rate annual dividend of $3.92, the stock is trading at a 6.8% yield. Return PotentialBelow is the back-of-the-envelope math on the return potential of an investment in VLO at the current share price of $57.87. Assumptions:
If we assume the economy normalizes in two years, this would be a 27% IRR. At three years, this would be a 17% IRR. In the interest of conservatism, these returns do not include dividends. Though VLO's payout will likely be materially reduced for a few quarters, it is reasonable to assume that at least a couple of dollars of dividends will be paid out before the economy gets back to normal. These IRRs are highly attractive for such a "boring" company. Though near-term share price volatility is likely, there is little risk of long-term capital impairment with an investment at the current share price. Sources: Company disclosures, FactSet, EIA, The Elevator Pitch Investment ideas do not constitute an offer to buy or sell securities and are general in nature, not directed or tailored to any particular person. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. No representation or warranty can be given that the estimates, opinions, or assumptions made herein will prove to be accurate. The author may hold a position in the securities profiled. Any projections and forward-looking statements included herein should be considered speculative. [link] [comments]  |
| Posted: 28 Apr 2020 04:38 AM PDT |
| Posted: 28 Apr 2020 01:21 PM PDT Much has been talked about when it comes to stock picking, however, I found that the topic of portfolio allocation methodology is very rarely discussed in a detailed way among the value investors. And when it does, it is usually discussed in very broad terms along the line of "you should have a concentrated portfolio". Does anyone have any knowledge to share or know of any educational resources on portfolio allocation for an active investor practicing value investing? Hoping to get answers to such questions as what percentage you should hold in cash reserve (so you have bullets to act on new ideas), what percentage should you allocate for each holding. And also, what happens if you have different levels of convictions for your stock picks? Should you allocate different percentages to your picks accordingly? Thanks! [link] [comments]  |
| Katina Stefanova Claims a $1 Billion Investment in Marto Capital. Is It Real? Posted: 28 Apr 2020 04:37 AM PDT |
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