Valero Energy Might Represent Buying Opportunity
Valero Energy, which reports Q3 earnings later today, is trading 23% below its price at the start of August. The company has warned that earnings will be well below expectations, but investors, now conditioned to expect bad news from Valero, have bid the stock up 4% on the hope that results will be merely terrible and not devastating. The Wall Street Journal’s Justin Lahart argues that this might be a good time to take a position in Valero. The stock took its hit this year because gasoline inventories had been beefed up to prepare for hurricanes that never happened, and too much gasoline on hand drove down profits. According to Lahart, however, the picture is not as grim as at appears. Refining margins may be low, but they are still far higher than they were in the late 1990s: producers of petroleum and coal products were running at 93% of capacity last month, versus 86% historically. Demand remains high enough to compel U.S. refineries to operate close to full capacity. Supply is outstripping demand for the moment, but because refiners are unlikely to build new refineries in the new future, demand should come back into line. Long term, the refinery business still looks attractive.
