Valero Energy Corporation (NYSE: VLO) is one of the world’s largest independent energy refiners.
In recent weeks, this has been a very good sector to be in, as oil prices rose above $70 a barrel and looked to be headed even higher as Memorial Day approached.
But, as with so many other sectors these days, a couple days can make a big difference.
Then, the North Korea talks were off, new tariffs on Chinese goods were imposed, Russia and Saudi Arabia announced they were upping production to make up for Venezuela and a trade war with Europe was brewing.
Then add to that the surprise move by two Italian populist parties to move toward getting out of the euro, which sent global markets into a bit of frenzy.
But what does all this have to do with a U.S.-based downstream energy company that refines, distributes, warehouses and retails oil, ethanol and natural gas products?
In reality, not much.
None of these issues are going to derail the global economic recovery that is going on now. And whether Valero is refining U.S. crude from shale fields or imported crude, it’s really all the same to them, as long as there is growing demand, which there is.
The fact is, VLO stock is up 35% year to date and is still delivering a respectable 2.6% dividend even after that run. Refining is part of the downstream oil business. Upstream businesses are the exploration and production (E&P) companies that look for and drill for energy. The midstream players are basically the pipeline companies that move the oil from the fields to the refiners.
The refiners are the top of the downstream sector, where the energy products get ready for consumption by industry and individuals.
When the economy is starting to recover, the best sector to be in is the midstream sector since it doesn’t rely on the price of the product but the volume. A growing economy means growing volume.
As the economy continues to grow, the refiners become the key players in the energy patch. Prices are rising and demand is increasing. Retailers depend on the refiners to get them their products with increasing frequency.
Of course, Valero also has retail operations, and rising prices at the pump also help margins there.
Unless you’re willing to risk the volatility of the upstream E&Ps, downstream players like VLO stock are the best choice for now. E&Ps are best when the energy bull market is in full swing and there’s more downside protection than there is now.
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Source: Investor Place