Valero Energy gains 54% YTD as falling crude widens refining margins

WTI crude's slide to around $75 a barrel — down from above $100 a month ago — is cutting input costs for Valero Energy Corp. just as global refining capacity constraints keep product markets tight.

"The combination of lower feedstock costs and constrained fuel supply creates a favorable environment for complex refiners like Valero," said a Morgan Stanley analyst who lifted the price target on the stock in recent weeks, citing a projected swing back to US$1.3 billion in net income by the first quarter of 2026.

Valero's shares have surged 96.4% over the past year and 144.4% over three years, though the stock eased 4.5% in a single session when the US-Iran peace deal — which includes reopening the Strait of Hormuz — was announced. The company trades at 18.09 times earnings, above the oil and gas industry average of 13.78 times, with an enterprise value-to-EBITDA multiple of 7.25 times versus 5.55 times for the sector.

The US-Iran framework deal, expected to be signed in Switzerland, could increase crude flows through the Strait of Hormuz, potentially pressuring refining margins if product supply catches up with demand. For now, with roughly 6% of global refining capacity offline due to Middle East conflicts and fuel inventories low, Valero's complex refineries — capable of processing discounted heavy sour crude — remain well positioned to capture above-average margins.

How the US-Iran Deal Reshapes the Margin Outlook

The reopening of the Strait of Hormuz introduces a new variable into Valero's earnings equation. Increased crude supply from the region could lower feedstock costs further in the near term, supporting crack spreads. But the same dynamic could eventually pressure product prices if additional crude translates into higher refinery runs globally. Valero's balance sheet provides a buffer: the company holds about US$5.3 billion in available liquidity, according to analyst estimates, and has been returning capital to shareholders through buybacks and dividends.

Peer Positioning in a Tight Market

Marathon Petroleum Corp. and Phillips 66 are similarly positioned to benefit from the current environment. Marathon runs the largest US refining system and noted on its first-quarter earnings call that roughly 6% of global finished fuel production capacity went offline due to Middle East conflicts. Phillips 66 expects its refining operations to contribute about 33% of total adjusted EBITDA by 2027. Valero's valuation, however, already reflects some of this optimism: a discounted cash flow model suggests an intrinsic value of about US$407.58 per share, implying the stock is roughly 37% undervalued at current levels, while a more conservative narrative pegs fair value closer to US$170.

This article is for informational purposes only and does not constitute investment advice.