market folly

Andreas Halvorsen's hedge fund firm Viking Global is out with their Q2 letter and in it they talk about their thesis on refiner Valero (VLO):


Viking's Thesis on Valero

"Valero is the largest independent oil refiner in the U.S. with over 50% of its capacity located around the Gulf of Mexico.  Over the past several years, Gulf-based refiners have been at a cost disadvantage because they had to buy expensive crude imports while their mid-continent competitors could source cheaper inputs domestically from shale oil developments.  We believe this cost advantage is shifting towards the Gulf as new pipelines carrying cheap domestic crude are completed, giving Valero the greatest benefit due to its strong presence there.  In a further boost to the company over the next couple of years, we think its access to discounted Canadian heavy crude also will improve.  These positive developments have been amplified by sound capital allocation by the management team, such as investing in crude transport logistics to gain access to cheaper inputs, acquiring two new hydrocrackers to improve production yields, spinning off a non-core retail operation, and allocating available cash to stock buybacks.  We find the current valuation attractive given the significant earnings potential once these factors start contributing to the bottom line."


Other Notable Q2 Moves

Viking also added or re-entered positions in Capital One (COF), Valeant Pharmaceuticals (VRX), and Thermo Fisher (TMO) during Q2.  All are were sizable top-10 positions at the end of the quarter, with COF being the largest as their #2 holding.

Lastly, it's worth highlighting that Viking is exploring the impacts of a potential slowdown in the Chinese economy.  While such effects have led to lower metals prices, a weak Australian dollar and luxury goods companies weakening, Viking is looking for consequences beyond those listed above.  In particular, they're focused on exploring potential unwinding of the leverage in the banking system.

For more on this fund, we've detailed some of Viking Global's recent portfolio activity here.  Additionally, we posted up a rare interview with Andreas Halvorsen.