Dropping It Like It’s (Not That) Hot: VLO’s MLP strategy in focus

Summary

  • Valero Energy Corporation’s (VLO) conservative valuation reflects a history of and expectations for cyclical margin pressures, secular regulatory pressures, and a management regime which does not create excess long-term shareholder value.
  • Management has singled out asset drop-downs to company sponsored MLP, Valero Energy Partners (VLP), as the most promising avenue for unlocking shareholder value.
  • Although the value gap between VLO and VLP is real, unless management radically accelerates VLP’s financing trajectory, the drop-down strategy will not significantly drive excess returns for VLO shareholders.
  • Disproportionate focus on arbitraging market value dislocations could detract from more enduring drivers of long-term value such as distressed asset acquisitions and continuous rationalization of core refining and logistics assets.
  • VLO’s core refining assets are among the best positioned and most complex in the world. If competently utilized, these assets are worth significantly more than the company’s market capitalization.

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The Ten Pillars of Quality Investing or: How I Learned to Stop Dumpster Diving for Undervalued Stocks

After recently having completed testing on a general method of discounted cash flow (DCF) analysis for estimating a broad basket of stocks’ intrinsic values, I became more concerned with “quality”. While DCFs remain the foundation of any sound business valuation, I discovered they are highly sensitive to the assumptions and data used. Slightly changing a minute detail can drastically influence the result causing an attractive investment to all of sudden seem not so attractive and vice versa. While relative valuation methods were a natural alternative (Wall Street’s preferred choice, in fact) to circumvent the sensitivity issues, I was inclined to believe that an ability to define robust ‘quality factors’ would complement the ideological purity of the discounted cash flow approach much better. The purpose of this discussion is to demonstrate that a good company can indeed also be a good investment.
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Yongye (ticker: YONG): A unique risk-arbit​rage opportunit​y

A lone Chinese female investor, Xingmei Zhong, d.b.a. Full Alliance International Ltd., finalized its plan to buyout all outstanding shares of YONG for $6.69 per share in cash. The deal is expected to close at the end of the first fiscal quarter of 2014 (i.e., between October and January). The buyout price reflects a 40% premium to YONG’s market price ($4.79) as of the date of the announcement on 12-Oct-2012.

At $6.25 per share, the buyout represent a 7.04% premium to market price. Investor’s looking for a relatively low-risk return on investment can engage in a risk-arbitrage trade. Investors can buy YONG now and will likely realize the differential between market and buyout price within 3 to 6 months. At the present, one could realize a 29.18% annualized return if the deal executes in 3 months; 14.20% if the deal executes in 6 months.

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Tomorrow’s IPO of Jones Energy (ticker: JONE)

My coworker told me about an email his broker sent about tomorrow’s IPO on Jones Energy (ticker: JONE). Interested, I did some preliminary research, and here is my email to him almost verbatim:

A word of caution on this deal. The main reason you hold off for now is that you probably are not prepared to sift through the 250 page IPO filing over the next 24 hours. Also, I have no idea what each share is worth because they haven’t even disclosed how many shares are going into the float (i.e., outstanding shares available on the market). Also, they have the disclosed the following below their income statement:

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