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Why Hold Strategy is Apt for Valero (VLO) Stock Right Now?

We issued an updated research report on refining and marketing player, Valero Energy VLO on Aug 22. We believe that improving throughput volume on higher refinery utilization will help Valero generate more cash flow. However, escalating debt load is a concern.

The company currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Among all the independent refiners, Valero offers the most diversified refinery base with a processing of 3.1 million barrels per day in its 15 refineries situated throughout the United States, Canada and the Caribbean. More importantly, Valero is best positioned to profit from increased refining margins, mainly due to its strategic refinery structure that enables it to use cheaper oil for more than half of its needs.

Also, higher throughput volume on the back of increased refinery utilization rates has been rewarding for Valero over the past four quarters. Following this development, the company managed to surpass the Zacks Consensus Estimate in each of the prior quarters with an average positive earnings surprise of 18.2%. Also, Valero’s price performance looks lucrative as reflected by its 17.7% gain over the past year as compared with the 3.4% improvement of the industry.

Investors should know that the company has been returning cash to shareholders on a regular basis. During second-quarter 2017, Valero returned $658 million to stockholders through dividend payments and share buybacks.

However, during first-half 2017, total costs rose on heavy maintenance activities. If the trend continues over the coming quarters, it could hurt the company’s profits.

Moreover, we are concerned about the company’s escalating debt levels over the past six quarters. From no debt as of December 2015, Valero’s long-term debt now stands at $8.4 billion.

Stocks to Consider

A few better-ranked players in the energy sector include TransCanada Corporation TRP, Transmontaigne Partners LP TLP and Range Resources Corporation RRC. All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.  

Headquartered in Calgary, Canada, TransCanada is a midstream energy firm in North America. The company posted an average positive earnings surprise of 4.06% over the last four quarters.

Transmontaigne – headquartered in Denver, CO – involves in transporting and storing refined petroleum products. The firm posted an average positive earnings surprise of 6.60% over the last four quarters.

Based in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of U.S. oil and gas resources. The company’s 2017 earnings are estimated to grow 116.5%.

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Valero Energy Corporation (VLO): Free Stock Analysis Report
TransMontaigne Partners L.P. (TLP): Free Stock Analysis Report
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Range Resources Corporation (RRC): Free Stock Analysis Report
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