- VALERO
US EQUITIES
Valero: The New Deal for the World’s Most Competitive Refiner
- Since the launch of Operation Epic Fury on February 28, 2026, by the United States and Israel in Iran, the world has been experiencing a severe energy crisis due to the blockade of the Strait of Hormuz, a situation that has been well documented to date.
- On the U.S. stock market, North American refiners are benefiting greatly from this situation. The three independent refiners in the S&P 500, Valero Energy, Phillips 66, and Marathon Petroleum, have risen by 21%, 19%, and 25% in dollar terms, respectively, since the start of the conflict. In fact, they have outperformed both integrated oil companies (+10%) and oil companies focused on exploration and production (+15%). However, their short-term stock market performance is not merely the result of a windfall; their structural advantage was reestablished in the mid-2010s and is expected to strengthen further in the future.
- The refining business, which involves converting crude oil and other feedstocks into gasoline, diesel, jet fuel, and other distillates is highly volatile and have thin margin. It depends on numerous factors that refiners cannot control in the short term. First, the gross margin on variable costs depends on the price multiples of crude oil and the prices of refined products based on their quality and delivery point, as well as the price of natural gas and electricity, essential inputs in the refining process. Second, a refinery is a highly sophisticated industrial complex that is expensive to build and difficult to manage. For example, Dangote’s mega-refinery in Nigeria, inaugurated in 2023, cost $19 billion for a refining capacity of 500,000 barrels. A quick calculation reveals the replacement value of Valero’s refineries, which have a capacity of approximately 3 million barrels of petroleum products per day: $19 billion * 3,000 / 500 = $114 billion. By way of comparison, Valero’s enterprise value (EV: market capitalization + net debt) is $83 billion and its tangible assets at cost is worth 50 bn$.
- With the Strait of Hormuz blocked, refiners in the Gulf of Mexico, who already benefited from highly competitive advantages, are currently taking full advantage of this windfall. First, the Gulf of Mexico has access to abundant crude oil from the entire geopolitically stable American continent: Canada’s oil sands, U.S. shale oil, offshore oil in the Gulf of Mexico, and more broadly from Latin America. Second, this oil is discounted because some of it is heavy, sour, high-sulfur, transported in part within the continent, or regularly subject to congestion, such as WTI delivered to Cushing, Oklahoma, compared to Brent delivered in the North Sea. The difference between Brent and WTI, two oils of similar quality, has risen from $4–6/barrel in the two months leading up to Epic Fury to nearly $14 this week. Furthermore, the United States has a very competitive natural gas price. Valero estimates this advantage at $2.70 per barrel in 2024 compared to $1.00 per barrel in 2019 relative to Europe. By 2026, this advantage has grown even further: the spread between TTF (natural gas delivered in Europe) and Henry Hub (gas delivered in Louisiana) is $16 per mmBtu, compared to $5 to $11 in 2024.
- Furthermore, even without taking into account the tensions in the refining market linked to the Russia-Ukraine conflict and the blockade of the Strait of Hormuz,the market is now more balanced, whereas it had long been in a state of overcapacity following 2009 crisis. In its quarterly earnings release on January 30, 2026, Valero’s management estimated that global demand for petroleum products would grow by 500,000 barrels in 2026, compared to 400,000 barrels for supply, assuming that Russian refineries operate normally. The refining industry has stabilized: global investment in refineries has fallen from $100 billion in 2009 to $70 billion in 2023; refinery closures continue in the West; China has not been a net exporter of petroleum products since 2021 (curiously, it was a net exporter from 2016 to 2021); refining capacity in Latin America is chronically underutilized (4.7 million barrels refined, or 62% of capacity, in 2024, compared to 6.6 million barrels in 2009, when 81% of capacity was utilized).
- Finally, even if the conflict in Iran remains simmering, the Middle East’s ambition to become a giant refining hub is clearly at risk. Furthermore, controlling logistical assets (pipelines, tankers, terminals, etc.) and a distribution network allows the companies controlling them to also benefit from the disruption of maritime transport in the Middle East, which has repercussions throughout the world. For example, the $2 million extortion per tanker by the Iranian Revolutionary Guards to pass through the Strait represents a reported cost per barrel for a Suezmax tanker (1-million-barrel capacity) of $2/barrel.
- Valero is arguably the stock that best embodies all of the advantages mentioned above. 58% of its refining capacity (2.7 million barrels of crude per day) is located in the Gulf of Mexico, and 91% is in the United States. Furthermore, its refineries are both flexible and sophisticated enough to process the heaviest, high-sulfur crudes, such as those from Canada and Venezuela. For example, Valero has refined 240k barrels per day of Venezuelan crude over the past ten years and should be able to refine significantly more following the installation of a new coker in 2023 at Port Arthur and sanctions lifting. Its management is of very high quality; for instance, its capacity utilization rate is 98% in 2025. Valero also has an expansive logistics network (3,000 miles of pipeline, 130 million barrels of storage capacity, two Panamax tankers with a capacity of 500,000 barrels, and several terminals) that helps internalize margin through the value chain.
- Modeling future free cash flow (FCF) available to Valero’s shareholders is a challenging task given the multitude of variables involved. However, it appears to us that the crisis in the Strait of Hormuz could be worse than 2022 crisis and it reinforces, within an already favorable context for Valero: 1) the probability that in 2026 Valero will be able to generate higher FCF than in 2022 (>$10 billion in FCF) compared to $4 billion in 2025; 2) a continued rerating of its valuation given its competitive advantage. At a share price of $248, the FCF/EV ratio should therefore range between 5% and 12% depending on market conditions. Finally, while stock performance will be highly volatile, it will be uncorrelated with the rest of the market.
