Unraveling the Valero Energy Corporation (VLO) Spin-off

In addition, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and other vertically integrated companies have a lot more assets at their disposal because they are vertically integrated. They can absorb lower margins through other business segments like refining. CST Brands lost this type of advantage after it split off of Valero Energy Corporation (NYSE:VLO).

However, location and the price of gas is really what drive customers to go to certain gas stations. CST Brands has been profitable so location should not be an issue. Also merchandise and other services actually make up about 50% of CST Brands’ gross profits. Thus, as long as the gas is competitively priced CST Brands should remain profitable. The worst case scenario would be a 50% drop in profits which would put CST Brands’ value at about $29 per share.

Long-term risk

It should be noted that the biggest long-term risk to gas stations is that the earth might be running out of crude oil. If all the oil is used up or oil becomes a negative net energy to drill, gasoline powered cars will likely become obsolete. People would no longer need to stop at gas stations to buy gasoline so sales of other merchandise would likely drop as well.

While this is a legitimate long-term risk, gas stations would probably survive. Vehicles are essential to the modern world so even in a world without oil another type of fuel or energy carrier would likely be used to power vehicles. Since gas stations are already well positioned infrastructure for local service of vehicles, they would probably be modified to continue providing refueling services. Overall, CST Brands faces legitimate risks, but the company looks like a solid investment.

The article Unraveling the Valero Spin-off originally appeared on Fool.com and is written by Alvin Gonzales.

Alvin Gonzales owns shares of Valero Energy and CST Brands. The Motley Fool owns shares of CST Brands. Alvin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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