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Investing.com -- TD Cowen downgraded Valero Energy (NYSE:VLO) to Hold from Buy, warning that the stock now reflects an overly optimistic outlook for refining margins, even as it raised its price target to $140 from $118.
Shares of Valero, up 19% year-to-date, have rallied sharply over the past few years and are now pricing in near-record earnings levels.
The firm estimates current valuation implies EBITDA of about $7.30 per barrel—levels surpassed only during the 2022-23 spike driven by the Russia-Ukraine war.
“We see potential for stabilization-to-downside from here given bullishness reflected in the stock and limited underlying earnings growth,” the analysts wrote. There is limited underlying earnings growth and expectations of weaker refining margins in the second half due to seasonal pressures and a likely slowdown in diesel strength.
TD Cowen’s mid-cycle forecast assumes Valero earns $6.90 per barrel in refining EBITDA, slightly above its 2015–19 average, factoring in improved capture rates and the closure of the Benicia refinery.
While acknowledging Valero’s strong share repurchase program could support free cash flow per share, the brokerage said investors tend to focus more on near-term market dynamics in valuing refiners.
It expects global refining capacity to rise by 500,000 barrels per day annually outside China, enough to keep supply and demand in balance over time.