A few months ago I gave a CAPS thumbs up to Valero (VLO) thinking that its stock was beaten down enough to make it a reasonable value and that crack spreads would improve. Let me tell you something, boy oh boy am I glad that I closed my pick a few days ago.
Refiners suck. They lose money when the price of oil goes up. They lose money when the price of oil goes down. I hesitated to close my pick in the red, but I saved my CAPS portfolio a lot of pain by doing so before the stock fell nearly 20% yesterday.
I realize that no new refineries have been built in the U.S. since 1902 or something like that, but refineries are being built in other areas of the world and the gasoline and other products that they create can be imported to the U.S. if it is economically viable. Refiners are being squeezed as the price of oil rises while the demand for gasoline remains flat at best. And look at the headwinds that refiners face in the coming years, the government is encouraging us to use less gas by raising the fuel economy standards, plug-in vehicles may actually become viable at some point, on and on and on.
Valero's management is terrible. Rather than issuing a nice dividend or investing in their business, over the past three years they bought back 141 million shares at a total cost of $8.76 billion some for as much as $68.80 per share. Well guess what, now the company needs cash. Surprise surprise. It announced yesterday that it will issue 40 million new shares at $18.
In search of a way to destroy even more shareholder value, the geniuses at Valero even branched out into ethanol by purchasing some of the plants of the bankrupt company Verasun.
This company is so messed up and its industry is so bad that I won't even touch its corporate bonds.