Valero Energy

Methodology

Valero's fair value calculation is extremely challenging due to the cyclical nature of refining margins, where crack spreads fluctuate wildly based on crude oil prices, product demand, and refinery utilization rates. The method works only when applied to normalized mid-cycle margins, as peak refining periods create artificially low P/E ratios while trough periods show extremely high ratios despite potentially attractive entry points. Investors should focus on replacement cost valuation and returns on capital employed rather than relying on P/E multiples that swing dramatically with commodity cycles.

Methodology

PEG ratios are highly misleading for Valero because refining earnings are inherently cyclical, with growth rates swinging between massive gains during tight markets and losses during oversupply periods unrelated to company execution. Low PEG ratios during margin peaks typically signal late-cycle positioning rather than value, while high or undefined ratios during margin compression may represent opportunity. Investors should evaluate Valero on normalized refining margins, utilization rates, and competitive positioning rather than trusting current PEG calculations.

Methodology

Valero pays a meaningful dividend, so PEGY provides some valuation support during refining downturns when earnings collapse and traditional PEG becomes meaningless or turns negative. However, the dividend itself may face pressure during extended margin weakness, making sustainability a concern during deep cycles. For income investors in refining, PEGY captures the yield component but cannot overcome the fundamental challenge that commodity-driven earnings create unreliable valuation frameworks.