Valero Crushes Earnings, Dangote for the Win, and Nigerian Oil Wahala

I recommended Valero back in February and since then, I’ve been picking up their stocks, along with Chevron and ExxonMobil. Well, their last quarter reports came in a few weeks ago, and the absolutely crushed everything in sight.

Earnings in the 2nd quarter of 2015 increased by over $1billion compared to previous year, due to “higher margins on gasoline and other products.” Since production in the US is still very high, and inventories are climbing, refiners are absolutely in the best position to profit from current declines in crude, because that increases the spread between crude and refined products like gasoline, natural gas, diesel etc. Valero also has the advantage of being a low cost refiner compared to its peers like Tesoro or Marathon. Where the other two spend around $9 and $7 per barrel in refining costs, Valero spends only $5.50.

Finally, the company reduced its cash dividends in favor of buying back their stock, spending over $1.8 billion so far in 2015 in buybacks. That is a way of increasing the value of their remaining shares by spreading their earnings to a lower share basis, benefitting the remaining shareholders.

All of that has resulted in the stock being up almost 40% this year. However, when you account for the effects of the buybacks, as well as dividends, your total return as a shareholder is actually higher than 40%. To put it in easily understood terms, if you had put $10,000 into Valero at the begging of this year, you would be sitting on around $15,900 worth of their stock today, as well as collecting almost $270 worth of dividends, which if you keep reinvesting will slowly increase your ownership over time. 

What makes it even more interesting is that in that same time, oil prices have fallen more than 57%, and oil majors like Chevron, ExxonMobil and Conocophillips have returned -12%, -19% and -24% respectively. S&P 500 meanwhile, is only up 3% for the year.

It shows that with some smart decision making, there is always a way to make money in most situations.

Personally, while I do have some success with Valero, and my positions in Tesla and Mobileye are still up, my total returns for the year are still negative because I deliberately have been buying shares in Chevron and ExxonMobil, which though they’re hurting my portfolio now, should reward investors who stuck through the volatility with even higher ownership in the future. For that, I’m willing to bear the lower returns in the present, since most of my investment has a 20-30 year horizon anyway.

For now, I’ll keep my eye on Valero, Tesoro and a few others. I’m eager to see what their full year report looks like.

And because I cannot resist bringing up Nigeria, it’s times like this that we would have benefited from working domestic refineries. Instead, we are stuck with the declining end of the oil trade where foreign refineries buy our crude at a cheap price (that is when they even buy, as a lot of our inventory is sitting out in the sea for lack of buyers, meaning that we might have to go even lower than $45 to sell), and then sell the higher margin refined products back to us. That’s why I support the current state petroleum minister Kachikwu’s contemplated $500m attempt to get some of our refineries working. The elephant in the room, however, is Dangote’s refineries which will more than meet domestic demand and then some. I can see a situation where he buys the increasingly cheap Nigerian crude, then supplies the country and neighboring ones with refined products. In addition, fertilizer by products, and natural gas investments may turn him into the lifelines for our agriculture and power sectors.

I’d consider buying Dangote Group stock if I were you.

Adios.

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