In a column last month I mentioned that a Buy recommendation would be forthcoming on Valero (NYSE: VLO). I have been in a holding pattern since then, primarily for two reasons. 

One, I wanted more clarity around the future of the ethanol compliance issue that is presently costing Valero about three-quarters of a billion dollars a year. Clarity was recently provided (much to the chagrin of Carl Icahn), but it was that the status quo will remain for now. So Valero will continue to pay these compliance costs for the foreseeable future. 

That’s a drag on earnings, but it’s a drag that’s built into the share price. Valero produces a significant amount of the ethanol it needs, lessening the impact of ethanol policies on its bottom line. Should the ethanol compliance issue be changed in Valero’s favor in the future, that should provide a significant boost to the share price. 

The second issue I was waiting to see clarified was with Venezuela, given Valero’s dependence on Venezuelan crude. I addressed the situation last month in Impact Of Potential Oil Sanctions On Venezuela. According to data from the Energy Information Administration (EIA), only 6.5% of the crude Valero processed in 2016 was from Venezuela. So this isn’t a serious risk to Valero’s business, but I was concerned that uncertainty may push Valero’s share price down.

That did in fact happen. In the past three weeks, Valero shares have fallen by 7%. While there may still be a little downside from here, I believe this marks a compelling entry point for investors. Let’s review the positives. 

Valero processes more crude oil globally than any other independent petroleum refiner. Refiners tend to do well when oil prices are stable or falling. Over the past year, Valero produced more cash flow and EBITDA than any of its competitors. Nevertheless, when compared to its peer group of refiners, Valero has less relative debt, a higher yield, and a lower EV/EBITDA ratio. The dividend has grown for six straight years, and the current yield of 4.3% only reflects a payout ratio of 68%. 

The refining group overall has outperformed not just the abysmal performance of the overall energy sector over the past three years, but it has outperformed the broader market indices. Barring a sharp uptick in the price of oil, the good times should continue for refiners. Marathon Petroleum Corp (NYSE: MPC) has performed well since being added to the portfolio last fall, but it’s time to add a refining bellwether to the group. 

Buy Valero Corporation up to $70.