Valero Partners for Renewable Diesel

Valero Energy Corporation (VLO - Analyst Report) joins hands with Darling International Inc. (DAR - Snapshot Report) for a joint venture, which will build a facility for renewable diesel. The facility would be adjacent to Valero’s St. Charles refinery near Norco, Louisiana, and will be capable of producing over 10,000 barrels per day or 135 million gallons per year of renewable diesel. 

Valero is the largest refiner in North America and Darling International Inc. is the largest publicly traded food processing by-products recycling company in the United States. Both the companies are jointly seeking a loan guarantee from the U.S. Department of Energy (DOE) for the project. 

While the loan application process has been initiated, the project is in the early phase of its life. Both the companies are expecting positive results from the loan application as the DOE makes $8.5 billion of debt financing guarantees available for projects that employ innovative energy efficiency, renewable energy and advanced transmission and distribution technologies. In addition, the final go-ahead remains subject to the approval of the Boards of Directors of both the companies. 

The experience of Valero in North American refining and marketing pitch and the potential of Darling to provide low-cost carbon-friendly feedstocks will help meeting America's growing renewable energy demands, in our view. 

However, as the largest refiner in North America, Valero is currently experiencing a combination of weak demand and excess production capacity. These are expected to weigh on near-term margins. We are also concerned about the high inventory levels and a decline in the price differentials between the light/sweet and heavy/sour variety of crude oils. 

Given these headwinds, we expect Valero to operate less efficiently than the broader equity markets in general and the oil and gas group in particular. We therefore maintain our Underperform recommendation for the stock.