Valero Energy's Resilience in Refining Amid Renewable Diesel Uncertainty

Valero Energy (VLO) has long been a bellwether for the refining sector, and its 2025 performance underscores both the opportunities and challenges of navigating an energy transition. With a “Buy” consensus from 27 analysts and an average price target of $160.50—implying a 1.86% upside from its recent price of $157.51—market optimism remains strong despite mixed results in its renewable diesel segment. The question for long-term shareholders is whether this optimism is justified by Valero's operational resilience and strategic adaptability.

Refining Resilience: A Pillar of Stability

Valero's refining segment has been a standout performer in 2025. For Q2, the unit reported operating income of $1.3 billion, up 8% year-over-year, driven by a 10.9% increase in refining margins per barrel to $12.35Valero Energy Reports Second Quarter 2025 Results^[1]. This success stems from operational excellence, including record throughput rates in the U.S. Gulf Coast and near 94% utilization of refining capacityValero Energy Corp (VLO) Q2 2025 Earnings Call Highlights^[2]. Analysts like Piper Sandler have highlighted these strengths, noting that Valero's optimization projects and cost discipline position it to outperform peers amid industry-wide margin compressionCan Analyst Support for Valero’s (VLO) Refining Business Shift …^[3].

The refining sector as a whole, however, faces headwinds. According to a report by Boston Consulting Group, refining margins have fallen to pre-pandemic levels from their 2022 peaks, with structural challenges like declining gasoline demand and regulatory pressures exacerbating downward pressureFuture for Refiners is Dictated by Costs and Margins^[4]. Yet Valero's refining business has shown remarkable adaptability. For instance, its U.S. West Coast operations saw margins surge 21.3% to $18.02 per barrel in Q2, a direct result of recent investments in capacity upgradesValero Energy Earnings Q2 2025 | Valero Energy News & Analysis^[5]. This resilience has drawn cautious optimism from analysts, with UBS raising its price target to $164 and Goldman Sachs upgrading Valero to “Buy” with a $154 target, citing improved crude differentialsValero Energy (VLO) Stock Forecast & Analyst Price Targets^[6].

Renewable Diesel: A Work in Progress

While refining remains a strength, Valero's renewable diesel segment has been a drag on performance. In Q2 2025, the unit posted an operating loss of $79 million, a stark contrast to the $112 million profit in Q2 2024Valero Energy Earnings Q2 2025 - Report^[7]. This decline was driven by a 73% drop in per-gallon margins to $0.22 and a 22% decrease in sales volumesU.S. biodiesel and renewable diesel imports fall sharply in 2025^[8]. The challenges are not unique to Valero—industry-wide, renewable diesel markets are adjusting to oversupply and regulatory uncertainty. For example, U.S. biodiesel imports fell to 2,000 barrels per day in 1H25, down from 35,000 b/d in 1H24, as tax credits for imported biofuels expiredValero Distributed Energy Initiatives for 2025: Key Projects ...^[9].

Yet Valero's long-term commitment to renewable fuels remains intact. The company has allocated $2 billion in 2025 for sustainability projects, including optimizing the St. Charles refinery and converting the DGD Port Arthur plant to produce sustainable aviation fuel (SAF)Renewable Diesel Market Size, Global Report 2025^[10]. These investments align with a rapidly growing market: the global renewable diesel sector is projected to expand at a 17.38% CAGR through 2034, reaching $149.73 billion by 2034Valero Energy Q1 Earnings 2025 | Valero Energy News & Analysis^[11]. Analysts like Raymond James have upgraded Valero to “Strong Buy,” citing its potential to capture market share in this high-growth arenaExpert Outlook: Valero Energy Through The Eyes Of 5 Analysts^[12].

Balancing Risks and Rewards

The key question for investors is whether Valero's refining strength can offset near-term renewable diesel challenges. On one hand, the company's refining operations have proven resilient, with strong cash flow generation and a $9.7 billion liquidity bufferValero Energy Reports Second Quarter 2025 Results^[13]. Shareholders have also benefited from consistent returns, with $695 million returned via dividends and buybacks in Q2Valero Q2 Profit Down YoY on Lower Volumes^[14]. On the other hand, the renewable segment's struggles highlight execution risks. A $1.1 billion writedown from the Benicia refinery closure underscores the costs of restructuring in a shifting regulatory landscapeValero Energy (VLO): Analysis of Performance, Tariffs, Strategy^[15].

Analysts remain divided. While firms like Mizuho and Piper Sandler have raised price targets to $190 and $200, respectively, others like Evercore ISI have set a conservative $135 target, factoring in regulatory uncertainties and feedstock volatilityValero Energy (VLO) Stock Forecast and Price Target 2025^[16]. The latter caution that Valero's renewable diesel strategy hinges on securing stable feedstock supplies and navigating state-level policies like California's Low Carbon Fuel Standard (LCFS)U.S. Renewable Diesel Market Size to Hit USD 21.70 Bn by 2034^[17].

Strategic Buy? A Cautious Yes

For long-term shareholders, Valero's current valuation appears justified by its refining prowess and strategic bets on renewable fuels. The refining segment's ability to generate consistent cash flow provides a buffer against renewable diesel headwinds, while its $2 billion capital allocation for 2025 signals confidence in the energy transition. Moreover, the global renewable diesel market's projected growth—driven by policy tailwinds and decarbonization mandates—offers a compelling long-term narrativeRenewable Diesel Strategic Market Roadmap: Analysis and^[18].

However, investors should not ignore the risks. The renewable diesel segment's margin volatility and the refining industry's structural challenges (e.g., declining gasoline demand) could weigh on earnings in the near term. A strategic buy makes sense for those comfortable with a 3–5 year horizon and the ability to weather short-term fluctuations. For more risk-averse investors, a “Hold” stance until Valero's renewable initiatives show clearer traction may be prudent.

Conclusion

Valero Energy's 2025 performance illustrates the duality of its position: a refining powerhouse navigating a declining sector while betting big on renewable fuels. Analyst optimism, reflected in a 1.86% average upside target, is largely justified by its operational discipline and long-term growth prospects. Yet the path to realizing this potential is not without hurdles. For long-term shareholders, the key will be balancing confidence in Valero's refining resilience with patience as its renewable diesel strategy matures.