Valero Energy (VLO): A Refining Gem with Renewable Firepower – Buy Now Before the Spread Recovers

Investors, here's a stock that's flying under the radar but ready to soar: Valero Energy (VLO). Despite short-term headwinds, this refining powerhouse is primed to outperform once refinery margins stabilize. Let me break down why VLO deserves a Buy rating now.

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### 1. Free Cash Flow Resilience: The Hidden Strength
Valero's free cash flow (FCF) is the unsung hero here. While Q1 2025's headline net loss of $595 million spooked some, dig deeper and you'll find a different story. Adjusted net income rose to $282 million, and FCF remained robust at $703 million, even after a $1.1 billion impairment charge for underperforming West Coast assets.



Compare this to 2022's record $9.9 billion FCF, and yes, there's a dip—largely due to strategic write-downs and reinvestment. But FCF remains a fortress, especially when paired with $4.6 billion in cash reserves and a 19% debt-to-capital ratio. This liquidity gives Valero the flexibility to weather volatility and double down on growth.

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### 2. Strategic Diversification: Betting on Renewables
Valero isn't just a refiner—it's a renewables disruptor. Its $230 million investment in optimizing the St. Charles refinery is a masterstroke. This project will boost high-value renewable diesel and sustainable aviation fuel (SAF) output, capitalizing on a $50 billion SAF market by 2030.

Consider its joint venture Diamond Green Diesel (DGD), which produced 1.2 billion gallons of renewables in 2024. While Q1 margins dipped due to temporary factors like rising feedstock costs, sales volumes held steady at 2.4 million gallons/day. As Valero scales SAF production (targeting 50% utilization), these margins will stabilize—and then some.



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### 3. Undervalued Stock: Buy While the Market Sleeps
Valero's stock trades at a P/E of 11.74, well below its five-year average of 14.5. Analysts' price targets range up to $149, a 7.2% premium to current levels. Even better: its EV/EBITDA of 8.2x is a steal versus peers like Marathon Petroleum (MPC) at 10.5x.



The market is missing the point. Valero's 4.2% dividend yield (hiked 6% in Q1) and buybacks ($277 million in Q1 alone) are underappreciated catalysts. With 70% of FCF returned to shareholders, this is a dividend stalwart in a shaky market.

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### 4. Near-Term Volatility vs. Long-Term Growth
Yes, refining margins are volatile. Q1's $9.78/barrel refining margin was down from $14.07 in 2024, but Q2's results show progress. Net income jumped to $583 million, or $1.03 per share, versus a $0.48 loss last year. The 3-2-1 crack spread (a key refining metric) improved to $25.88/barrel in June, hinting at stabilization.

Meanwhile, Valero is exiting high-cost operations like its Benicia refinery, which will cut losses and redirect capital to renewables. This discipline is critical as oil prices fluctuate—Valero's Gulf Coast dominance and low-cost feedstocks give it a leg up.

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### 5. Risks? Yes—but Manageable
Bearish arguments focus on oil price drops or SAF policy delays. But Valero's $8.5 billion debt is manageable, and its FCF can weather a price dip. Plus, U.S. Renewable Fuel Standard (RFS) mandates are here to stay—SAF demand isn't going anywhere.



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### Final Pitch: Buy Now, Bank Later
Valero is a value play with growth embedded in its DNA. The stock trades at $138, but with $143.55 in intrinsic value and a $148.23 target, this is a no-brainer.

- Buy now for dividends, renewable upside, and a refinery rebound.
- Hold for 12-18 months as SAF demand surges and margins stabilize.
- Avoid if you're a short-term trader—this is a long game.

The writing's on the wall: Valero's refining expertise and renewable pivot make it a buy at these levels. Don't let today's volatility blind you to tomorrow's gains.