Valero Energy Corp (VLO)

CRAZYCAPTAIN (99.81) Submitted: 7/02/07 11:02 AM : Start Price: $70.30 VLO Score: -35.97

The company remains in the early stages of a shift in operational focus geared towards building shareholder value via the combination of improved operational performance and meaningful share repurchase.

Valero recently filed an 8-k which contained the slides for a European non-deal roadshow. In short, the presentation reiterated the investment highlights, mainly a shift in the company’s strategic focus to operational excellence versus its historic focus on growth via acquisition and a bullish outlook for industry over the balance of the decade.

The only new item was the inclusion of a slide which detailed that given current First Call ’07 EPS of $9.51 the company would have the capacity to repurchase $7.29 billion of its common shares this year versus the currently announced plan to repurchase $6 billion. Such an increase would likely come from the sale of the Lima, OH refinery ($1.9 billion) as well as strong EBITDA generation given the current refining margin environment would result in an expansion of the $6 billion share repurchase program.

Previously, management had indicated that it would reduce share count by roughly 15% based on the $6 billion program.

Based on my ’08 EPS estimate of $7.95, I estimate that Valero should generate sufficient free cash flow to reduce its share count by an additional 5% next year. Valero is likely to sell an additional 2-3 refineries over the next 18-24 months, and that funds raised will be targeted towards additional share repurchase. Potential sales candidates include the company’s Krotz Springs, TX, Ardmore, OK and Memphis, TN refineries.

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