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Is This Bargain Basement Refiner the Screaming “Buy” of the Summer?

Valero Energy (VLO) grew from a tiny regional outfit with one refinery to what’s now the world’s largest independent energy refiner.

Its network of 16 oil and gas refineries stretches across North America and the United Kingdom.

The combined capacity of all these facilities gives Valero the ability to produce more than three million barrels of refined petroleum products a day.

I mention this to you now, because shares of the largest refiner in the world have gone on sale – the result of a tough selloff over the past few months.

Currently trading at about $34 a share, VLO is down more than 30% from its winter highs of $48.50 – a slide that’s pushed the stock into bargain basement territory and below the company’s book value.

So, why have shares been getting beaten down?

Risk Assessment

The first reason is commodity risk.

Oil refiners have enjoyed strong profits over the last year, thanks to the massive spread between the price of West Texas Intermediate crude and the price of Brent crude.

Indeed, the demand for energy products overseas allowed refiners like Valero to reap rewards off the difference.

However, this spread is shrinking… It’s down from more than $20 to about $10.

And Valero’s critics are afraid the days of record profits for refiners may be ending.

There’s also concern over proposed regulations that would require refiners to produce cleaner gasoline. That, too, could cut into Valero’s profit margin.

Of course, while these are real concerns, at this point, they’ve already been factored into the stock price. And with that, there are plenty of other reasons to consider VLO for your portfolio.

One Company – Three Chances to Profit

Valero registered earnings per share of $5.68 in the last quarter, faring better than most of its competitors.

And after the recent dip, its P/E ratio is a cheap 5.9.

Furthermore, Valero’s recent business moves have positioned it well for the future.

Valero has moved to take advantage of the massive boom in shale oil, having purchased thousands of rail cars to bring the heavy oil from the inland fields to its refineries.

And this past April, the company spun off its retail operations into a totally separate entity.

CST Brands (CST) is now one of the largest retail fuel distributors in the country, with 1,032 gas stations and convenience stores across the United States.

This move will not only allow VLO to concentrate on its core refinery business, it will give the company additional revenue when it sells its remaining shares in the future.

In addition, Diamond Green Diesel – a joint venture between its alternative fuel subsidiary, Diamond Alternative Energy and Darling International (DAR), the country’s largest publicly traded rendering company – has gone into production.

Diamond Green Diesel takes animal fat, corn oil and used cooking oil, and processes it into clean, renewable diesel fuel, comparable to regular diesel.

Two years in the making, the plant will take roughly 1.2 billion pounds of fat each year and turn it into 137 million gallons of “green” diesel.

And with the recent changes in the EPA rules regarding ethanol content in gasoline – boosting it from 10% to 15% – Valero’s corn fuel capacity could see expanding revenue.

Though some rating downgrades have been in the headlines lately – notably from Morgan Stanley (MS) and JP Morgan (JPM) – it’s important to note that the majority of analysts covering VLO continue to rate the stock as a “Buy.”

The consensus price target is right around $47, which would be a 30% bump from current levels. And one analyst, Barclays Capital, is extremely bullish on shares, with a target price of $72 – or roughly double the stock’s current value.

So, you can go with VLO, and possibly double your money.

You could go with CST Brands, the gas station spinoff from VLO – knowing that, historically, spinoffs and the parent companies outperform the market.

Or you could even consider shares in Darling, the hog renderer-turned-green diesel manufacturer. Those shares have seen a steady, if slightly choppy, rise since the company announced its launch into production.

There you have it. One company. Three opportunities.

And “the chase” continues,

Tim Diering