Goldman Sachs upgrades Valero on improved margin outlook, balanced valuation

Investing.com -- Goldman Sachs upgraded Valero Energy Corp (NYSE:VLO) to "Neutral" from "Sell," pointing to improved long-term margin potential and a more balanced valuation.

The brokerage set a new price target of $127, implying a total return of 15%.

The analysts cited three main factors for the upgrade: consensus revisions that better reflect a slowdown in refining profitability, an improving crude environment driven by OPEC’s addition of heavy barrels, and a more constructive supply backdrop following large refining closures such as LyondellBasell’s Gulf Coast plant.

While noting the continued uncertainty in demand, Goldman Sachs (NYSE:GS) said Valero’s relatively healthy balance sheet and strong cash flow generation should support shareholder returns, estimating a capital return yield of about 9%.

Goldman also noted that Valero shares have underperformed Marathon Petroleum (NYSE:MPC) and the XLE (NYSE:XLE) this year.

However, shares have meaningfully outperformed the S&P by roughly 119% in around 5 year period, supported by oil demand recovery, consistent dividend payments, and operational execution.

Risk/reward screens as more balanced, the analysts wrote, highlighting the company’s capital allocation strategy and expectations for favorable crude differentials and strong free cash flow.