Valero Remains Top Pick At Barclays Following Q2 Results, Notes 'Admirably Disciplined' Cash Management Strategy

In a report published Friday, Barclays analyst Paul Cheng reiterated an Overweight rating on shares of Valero Energy Corporation (NYSE: VLO) with a price target raised to $93 from a previous $86 following the company's second-quarter results.

Valero reported that it earned $2.66 per share in its second quarter on revenue of $25.12 billion. The company's results were higher than the $2.42 EPS and $19.91 billion in revenue analysts were expecting.

Valera said that it increased its cash balance to $5.7 billion at the end of the second quarter from $4.8 billion at the end of the first quarter and $3.1 billion in the same quarter a year ago. The company also accelerated its share repurchase program to $661 million in the in addition to increasing its payout ratio to 75 percent from 50 percent of net income.

According to Cheng, Valero's cash management strategy is "admirably disciplined" and may also be a "little overly conservative." In fact, the analyst is now projecting the company to generate a 12 percent average free cash flow yield between 2015 to 2019 after capex, compared to just 5 percent in 2014. He is also projecting the company to buy back $600 million per stock every quarter through the end of the decade.

Bottom line, Cheng argued that shares of Valera are "very inexpensive" based on a sum-of-the-parts analysis that yields a fair value in the mid-$90 range. In addition, the company will be "among the largest beneficiaries" from the wider Gulf Coast oil differentials, and the pending reversal of Line 9B.