There has been a record number of dividend cuts during the ongoing coronavirus crisis, particularly in the energy sector, which is one of the most severely beaten sectors. A bright exception has been the group of U.S. refiners, which have defended its dividends so far. However, as Valero (VLO) is poised to post material losses this year, it is likely to cut its dividend, given also the uncertainty arising from the pandemic. On the other hand, the stock has been beaten to the extreme and thus it has collapsed at its 7-year lows. In this article, I will analyze why Valero has become a conviction buy around its current price.

The effect of the pandemic

The pandemic has caused an unprecedented collapse in the demand for refined products this year. According to the Energy Information Administration [EIA], the global demand for refined products is expected to slump by 8.3 million barrels per day on average this year, from 101.4 to 93.1 million barrels per day. This will mark the steepest decline in the global oil consumption in at least three decades.

In its last conference call, at the end of July, Valero stated that the demand for gasoline and diesel had recovered to 85%-90% of normal, after bottoming at 50% and 70%, respectively, in April. However, the demand for jet fuel remained 50% lower than normal. As a result, Valero planned to ran its refineries at an approximate 79% utilization rate in the third quarter. This is a daunting utilization rate, particularly for the third quarter, which is the strongest quarter for refiners in normal years.

It is also important to note that Valero generates the vast majority of its earnings from its refining business. In addition, most of its refineries are coastal and thus they lack the benefit of

For Immediate Release

Chicago, IL – October 5, 2020 – announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Valero Energy VLO, Phillips 66 PSX, Marathon Petroleum MPC, Royal Dutch Shell RDS.A and HollyFrontier HFC.

Here are highlights from Friday’s Analyst Blog:

Oil Posts Quarterly Gain as Supplies Fall for Third Week

U.S. oil prices eked out a quarterly gain after a government report revealed a weekly decrease in crude supplies that was contrary to expectations. The third straight fall in domestic oil stocks was accompanied by a decrease in distillate inventories.

Additionally, the agency said that gasoline stockpiles increased and oil supplies at the Cushing, OK, delivery hub rose too, but these had little effect on the positive response to the Energy Information Administration (“EIA”) data. On the New York Mercantile Exchange, WTI crude futures gained 93 cents, or 2.4%, to settle at $40.22 a barrel on Wednesday. The commodity moved 2.4% higher over the past three months.

Analyzing the Latest EIA Report

Below we review the EIA’s Weekly Petroleum Status Report for the week ending Sep 25.

Crude Oil:The federal government’s EIA report revealed that crude inventories fell by 2 million barrels compared to expectations of a 1.9 million-barrel build. The combination of a sizable increase in exports and a ramp up in refinery activity accounted for the surprise stockpile draw with the world’s biggest oil consumer even as domestic production stayed firm. This puts total domestic stocks at 492.4 million barrels — 16.5% higher than the year-ago figure and 13% higher than the five-year average.

On a bearish note, the latest report showed that supplies at the Cushing