Valero Energy Corporation (VLO): Issues and Their Solutions

Subject: Case Studies
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Study level: College

Valero Energy Corporation (VLO)

VLO is a multinational marketer and manufacturer of transportation fuels as well as petrochemical products. The departments in the company are renewable diesel, refining, and ethanol. The renewable diesel department is responsible for selling renewable diesel to the refining department. The refining department comprises petroleum refineries, related marketing activities, and logistics assets that reinforce its refining processes. The ethanol department includes the function of the ethanol plants, related market activities, and logistics assets that support ethanol operations. Valero provides one of the best benefits programs in the refining and marketing sector, and it is among Fortune 500 companies that include numerous alternatives that satisfy family and individual needs. The table below shows valuation ratios that display the company’s relationship between the equity or market value and the fundamental financial metric of the company. These valuation ratios aim to establish consumers’ prices for some stream of earnings, revenue or cash flow, or any other financial metric.

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Table 1. Valuation ratios of Valero Energy Corporation

Valuation ratios of Valero Energy Corporation

Table 1 shows that the current ratio increased from 1.40 in 2019 to 1.71 in 2020. This means that VLO’s short-term obligation is expanding; hence, the company can pay its obligation. The quick ratio increased from 0.91 in 2019 to 1.06 in 2020, indicating that the company can pay its current liabilities by selling inventories. The debt ratio increased from 1.39 in 2019 to 1.64 in 2020, which means that the company has a greater financial risk. The total assets turnover ratio decreased from 2.01 in 2019 to 1.25 in 2020, which means the company is not utilizing its assets efficiently and suffering from internal problems. The return on total assets ratio decreased from 4.66 in 2019 to -2.69 in 2020, indicating that the company is inefficient and productive when managing its balance sheet to generate profits. Finally, the return on equity ratio reduced from 11.11 in 2019 to -7.20 in 2020. This means that the company is becoming less efficient in creating profit and enhancing shareholder value. The adverse effects on the company’s valuation were caused by the issues affecting the energy industry.

Issues Facing Energy Industry

The energy industry’s first issue is accumulating uncertainty that entangles the financial viability of the significant investments needed for developing large conventional and deep-sea oil and gas projects. These variabilities are created by factors that impact demand for gas and oil as well as from the effects on the shale gas production and the supply side of tight oil in the major importing countries. Some factors include increasing opposition to continuous dependency on hydrocarbons for hydrocarbon, growth of protectionism and nationalism, shifting to electric vehicles, and a quick fall in the price of energy from renewable sources. Currently, it is challenging to forecast upcoming demand for energy and even more complicated for energy that is hydrocarbon-derived.

The second issue is that the global energy sector is growingly exposed to similar risks that have a drastically distorted generation of power in the industry. These threats can be classified into three categories; investor risk, policy risk, and technological risk. All the three risks operate in a feedback loop such that they intensify each other. The investor risk stems from the engagement of institutional investors who are crucial stakeholders in the energy sector. The policy risk is caused by growing efforts addressing global climate change and depending on resources. The technological risk originates from rapidly improving competitiveness and economics regarding electric vehicles (EVs) and renewable energy. All these factors impact the traditional models of energy corporations. EVs and renewable-energy technologies have become efficient such that batteries and storage have become more competitive. This indicates that policy ambition is increasing, leading to intensified investor concern over the sustainability of conventional energy companies’ business models.

The final issue is that the global energy industry is currently playing catch-up. It requires resetting the cost base and productivity to ensure the resources are economically produced. Due to the transition in the energy landscape, there is a continuous increase need for productivity improvements. This has led to demand shifting to off-peak, and customers are demanding gas and oil that have low costs. Due to this, companies in the energy sector have been encountering even more significant challenges when trying to be innovative and shifting to cost-effective operating models.

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All the issues discussed above have been caused massive damage in the energy industry. These issues have led to incurring losses in the companies that are in the energy sector. They have also led to numerous acquisitions of companies in the industry and the exit of some companies in the industries. Additionally, they led to minimum entrant in the industry because no investors will invest in a business that will incur a loss. Due to these disadvantages caused by these issues, their solutions are discussed in the next section.

Solutions to the Issues

First, the industry should seek alternative fuels such as bio-alcohol, bio-diesel, non-fossil natural gas, chemically stored electric energy propane, vegetable oil, and other biomass sources. These alternative fuels will ensure that the industry depends on hydrocarbons only for renewable energy. Additionally, alternative fuels will reduce protectionism because there will be numerous options in the market such that countries will not need to protect domestic industries against foreign competition. The alternative fuels will also compete with the shift to electric vehicles and ensure that prices in the energy sector are stable. Therefore, all the energy sector uncertainties that affect its financial viability will be handled by embracing alternative fuels.

Secondly, the policy risk can be handled by combining the structure of electricity markets, arranging subsidy payments in the sector, and public ownership of off-takers. This means that companies in the energy industry will have easy access to the guarantee of multilateral development banks (MDBs) and political risk insurance (PRI). Further on, to handle investor risk, the energy industry should have a diversified portfolio in the sector, allocating different asset classes depending on the desired risk-return profile and dollar-cost averaging to eliminate the risk of wrongly timing the market. Finally, to handle the technological risk is by being innovative such that the products being manufactured in the sector are competing with upcoming technological developments such as electric vehicles. These solutions in the energy sector will ensure a minimum within the industry.

Finally, companies in the energy sector should be more creative and innovative, as well as shift to cost-effective functioning models: standardization in development, reconfiguring supply chain, field recovery, and production efficiency. This will need new abilities such as the gas workforce and aging oil to organize, modernize, and manage operations and projects. All these requirements are readily available because companies in the energy sector will hire a workforce, and most oil used in the energy sector are aged. Therefore, this will ensure that the industry handles its productivity and produces economic resources.

In general, the energy sector faces issues that affect the industry’s profitability. However, if the problems are handled as discussed above, it will ensure that these issues will be minimized and others will be eradicated. Minimization or eradication will ensure that the energy sector is profitable. Additionally, customers will be satisfied due to the fairness of prices in the industry. Therefore, all existing and new companies in the energy sector should strive to handle these issues to become successful.