What s happening now with VLO?

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1 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 TSR Spinoff Analysis Parent: Sector: Valero Energy Corporation (VLO) Oil & Gas - Refining & Marketing April 18, 2013 Spinoff: CST Brands, Inc. (CST) Sector: Retail Convenience Stores Motor Fuel & Merchandise Target Price Pre & Post Spinoff VLO (pre) VLO (post) CST Target Price Technical Split Upside (+16.4%) (+17.0%) (+6.8%) Horizon(mth) Risk Low Low Low Performance & EV VLO ( Pre Spinoff) $50 50m $40 $30 $20 $10 $0 Market Data VLO (pre Spinoff) Current Market Price $38.24 Return 5d/YTD/1Y (%) -11.0/12.1/58.8 Volatility 30d/90d/200d (%) 41.3/39.9/34.7 High/Low 1Y ($) 48.97/20.00 Avg d turn 30d/60d/90d ($ m) 504.2/476.9/413.0 Market Cap ($ m) 21,190 Net IB Debt ($ m) 5,642 Enterprise Value ($ m) 26,895 Miscellaneous VLO Spinoff Announcement July 31, 2012 Listing Exchange Ticker/Bloomberg NYSE VLO US Equity Outstanding shares (m) 554 Free float in % 99.7% Next news flow VLO (LHS) Volume (RHS) SPX (rebased to VLO prices) 40m 30m 20m 10m April 29, Q Earnings Top 5 shareholders VLO State Street 6.5% 0m Blackrock 6.4% Vanguard Group, Inc. 4.7% FMR LLC 4.2% Wellington Management Co. LLP 3.0% World s Largest Independent Refiner, Valero (VLO), to Spinoff its Retail Business / +16% Upside Pre-Spin / VLO ex Spinoff - Attractive 17% Upside / CST Performance to Improve Post Spinoff / TSR Model Portfolio Holding Valero Energy Corporation (VLO), with the aim to enhance shareholder value, has decided to Spinoff its retail business into a separate publicly-traded entity, CST Brands Inc. (CST). Post Spinoff, VLO will operate its refining and ethanol segment, while its Spinoff, CST with ~1,900 retail sites will be one of the largest independent retailers of motor fuel & convenience merchandise items in the US & Eastern Canada. TSR View: We are positive from the transaction as retail companies trade at a higher valuation multiple compared to the refining business. Currently, VLO pre Spinoff trades at a FY13E EV/EBITDA multiple of 4.0x. Post Spinoff, VLO will trade at a FY13E EV/EBITDA of 4.0x 4.50x, while CST will trade at a FY13E EV/EBITDA of 8x 9x, which provides an upside potential of ~16% on a combined basis. We believe that investors should enter into VLO stock on a pre Spin basis as favourable refining margins & stable retail business coupled with CST performance improvement post Spin will enhance shareholder value. What s happening now with VLO? Event: Valero (VLO) on July 31, 2012 announced the Spinoff of its retail business into a separate entity named CST Brands, Inc. (CST). On April 4, 2013, the VLO Board approved the Spinoff of its retail business through the distribution of 80% of the outstanding shares of CST common stock to holders of VLO common stock. Ratio: The Spinoff ratio is 1:9 (1 CST share for every 9 share of VLO common stock). CST common stock will be listed on the NYSE. When-Issued trading of VLO & CST has begun from April 17 & will continue through the distribution date, May 1 and regular way trading will begins from May 2. The distribution of CST shares will not be taxable for U.S. shareholders for the U.S. federal income tax purposes. Parent - VLO: Benefit from wider crude differentials & export market growth opportunities Valero (VLO) ex-spinoff will continue to be the world s largest independent refiner with 16 refineries in the U.S., Canada, the U.K and Aruba, with a combined total throughput capacity if ~3.0m barrels per day (bpd). Excluding the Aruba refinery, which has been closed, the current throughput capacity is ~2.8m (bpd). We are positive on VLO s refining business keeping in view favourable industry dynamics (wider crude differentials) and export market growth opportunities resulting in strong refining margins. The management indicated that in 4QFY12 it replaced all imported light foreign crude oils with cheaper domestic crude oils at its Gulf Coast and Memphis refineries, which could a provide margin uplift in FY13. VLO is well positioned to deliver earnings upside in FY13 from the first full-year operation of the Port Arthur hydrocracker plant and start of another hydrocracker plant at St. Charles scheduled for 2QFY13. The management expects an incremental EBITDA of $520m from the Port Arthur hydrocracker project and $380m from the St. Charles project. We believe that the possibility of an MLP creation as indicated by the management related to terminal and pipeline assets would result in value unlocking for the shareholders. We recommend a Buy rating on VLO (ex-spinoff), with a one-year price target of $ This implies an upside potential of 17.0% from the when issued price of $35.19 per share. Spinoff - CST: Favourable geographic presence and store expansion to drive growth CST Brands, Inc. (CST) with ~1,900 retail sites will be one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S. and Eastern Canada. CST retail sites are geographically diverse having presence in Southwestern U.S. and Eastern Canada, and are ~ 60% owned by CST brands. Around 61% of the U.S. retail sites are in Texas, which has a relatively favourable economy and attractive demographics for convenience stores. We believe that the CST retail business is relatively stable with consistent cash flow generation every year compared to the parent refining business where margins are affected by volatile crude oil prices and demand for gasoline and other petroleum products. Post Spinoff, CST will be listed on the NYSE with a market cap of $2.2bn and will not enter the S&P 500 Index. However, we are positive on CST Brands and expect the performance to improve going forward on the back of management focus on enhancing profitability through optimized motor fuel sales and driving growth through convenience stores sales. We recommend a Hold rating on CST (Spinoff), with a one-year price target of $ This implies an upside potential of ~6.8% on base case from the when issued price of $28.49 per share. On the bull case scenario, we see a one-year price target of $35.36 which implies an upside potential of ~24.1% from the when issued price of $28.49 per share. TSR will look to increase CST in the Model Portfolio post-split. Key figures and ratios (in $ m) VLO (ex-spinoff) CST (Spinoff) (Y/E Dec 31) Total Revenue 71, , ,115 10,371 12,863 13,135 Growth (%) 28.7% 57.4% 11.5% 18.1% 24.0% 2.1% Ad. EBITDA 2,982 4,824 6, Margin (%) 4.1% 4.3% 4.9% 3.6% 3.0% 3.0% Adj. Operating Income 1,687 3,406 4, Margin (%) 2.3% 3.0% 3.8% 2.5% 2.1% 2.2% Income from Cont. Operations 730 1,882 1, EV/EBITDA ( when issued price) 8.1x 5.0x 3.9x 8.7x 8.2x 8.0x

2 Table of Contents Part A - Fundamentals & Valuations What does Valero Energy Corporation (VLO) comprise?... 3 Spinoff Summary... 4 Snippets - TSR US Corporate Spinoff Study... 5 Previous Spinoff transactions in the O&G space... 6 Business Description... 8 Valuation Scenarios... 9 Key Highlights Valero Energy Valuation Summary VLO (ex-spinoff) Key Highlights CST Brands Valuation Summary CST (Spinoff) Part B - Technicals Technical Shareholdings Part C - Insiders Insiders Overview

3 What does Valero Energy Corporation (VLO) comprise? Valero Energy Corporation (VLO), a Fortune 500 company based in San Antonio, US, is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. The largest independent refiner in the United States, it operates 16 refineries with a total throughput capacity of 3.0 million barrels a day in the US, Canada, the UK, and Aruba. Apart from these refineries, it also operates 10 ethanol plants with a combined production capacity of 1.2 billion gallons a year and a 50 megawatt wind farm. VLO is also one of the largest retail operators in the United States, and runs approximately 6,800 retail and branded wholesale outlets in the United States, Canada, the United Kingdom, and the Caribbean under the Valero, Diamond Shamrock, Shamrock, Ultramar, Beacon, and Texaco brands. VLO operates through three segments: Refining, Ethanol and Retail. Refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The segment is segregated geographically into the US Gulf Coast, US Mid- Continent, North Atlantic, and US West Coast regions. VLO recognized asset impairment loss in FY12 related to the Aruba refinery resulted from its decision in March 2012 to suspend its refining operations and the subsequent decision in September 2012 to reorganize the refinery into a crude oil and refined products terminal, though the company still continues to recognize it under continuing operations. Currently, VLO is operating with 15 refineries with throughput capacity of 2.8 million barrels / day. Ethanol segment includes sales of internally-produced ethanol and distillers grains. VLO s ethanol operations are geographically located in the central plains region of the US. Retail segment includes company-operated convenience stores, Canadian dealers/jobbers, truckstop facilities, cardlock facilities and home heating oil operations. The segment is segregated into two geographic regions: Retail-US and Retail-Canada. Valero Spinoff of Retail Business Source: The Spinoff Report (TSR) Research, Company filings Segment Operating Income excludes corporate expenses 3

4 Spinoff Summary Taking a cue from a previous few Spinoff transactions in the O&G space that led to value unlocking and good returns for shareholders, Valero (VLO) on July 31, 2012 announced a Spinoff of its retail business into a separate entity named CST Brands, Inc. (CST) to enhance the shareholder value. On April 4, 2013, the VLO Board approved the Spinoff of its retail business through the distribution of 80% of the outstanding shares of CST Brands, Inc. common stock to holders of VLO common stock. Following the distribution, CST will be an independent, publicly-traded company, and Valero will own 20% of the common stock of CST for 6 months after the Spinoff, to which VLO will liquidate its remaining interest within 12 months. CST Brands common stock will trade on the New York Stock Exchange under the ticker symbol "CST. Valero common stock will continue to trade on the New York Stock Exchange under the ticker symbol "VLO. Spinoff Ratio (1:9): For every 9 shares held in VLO, shareholders will receive 1 share in CST held on the record date of April 19, Spinoff is expected to be tax-free transaction for US federal income tax purposes. Spinoff Timetable Events Timetable When-issued trading begins for CST and VLO April 17, 2013 Record Date April 19, 2013 Spinoff Date May 1, 2013 Regular-way trading begins May 2, 2013 Source: The Spinoff Report (TSR) Research, Company Filings Beginning on, or shortly before, the record date (April 17, 2013), and continuing up to and including through the distribution date (May 1, 2013), there will be a when-issued market in the CST stock (NYSE ticker symbol: CST WI ). Similarly, there will be two markets in VLO ordinary shares: a regular-way market and an ex-distribution market (NYSE ticker symbol: VLO WI ), which is expected to start on or shortly before the record date and continue up to and including the distribution date. The VLO shares trading on the regular-way market will carry an entitlement to receive CST common shares distributed in the Spinoff. Is VLO right in spinning off its retail business? Spinoff Rationale: We expect the Spinoff to be positive for shareholders. The key rationales for the Spinoff are: We believe that the intended Spinoff will unlock value for the shareholders as Retail companies trade at a higher valuation multiple compared to the Refining business. Currently, VLO trades at a FY13E EV/EBITDA multiple of 4.0x. Post Spinoff, VLO will trade at FY13E EV/EBITDA of 4.0x- 4.5x, while CST will trade at FY14E EV/EBITDA of 8x 9x. Both companies will be able to pursue their own growth strategies and prioritize investment spending and capital allocation accordingly. VLO will be able to pursue business opportunities in the Refining business, while CST will focus on enhancing profitability through optimized motor fuel sales and drive growth through convenience stores sales. 4

5 Snippets - TSR US Corporate Spinoff Study Based on the TSR US Corporate Spinoff Study with Deloitte - Dec 2011, please see below for a round-up of Parent and Spinoff companies in the Energy sector (mainly O&G) and their returns generated for shareholders with parent performance (one year post demerger), with an average and median returns at 72% and 50%, respectively. Parent One Month Post Announcement - Companies in the Energy sector posted a maximum return of 16%. The lower quartile saw a fall of 7%. Here, we are reminded that it is only select companies that are expected to create wealth for their shareholders via the Spinoff, that actually get rewarded by the market. From Announcement to Effective Date - Most of the sectors posted healthy average gains except the companies in the Energy and Diversified segments, with low returns compared to those of their peers. From Announcement to One Year After Demerger - We find that Energy sector performance improved from being the laggard sector leading up to the Spinoff. Energy sector companies generated the maximum returns for their shareholders, with average and median returns at 44% and 29%, respectively. Spinoff One month Post Demerger - Companies in the Energy sector performed the worst in the month following separation, with both average and median returns at a dismal -7%. Three months Post Demerger The Energy sector continues to perform poorly and shrinks shareholder value by 13% on an average. 1yr Post Demerger - Energy remains a drag, where the median performance slipped into negative (-2%). Spinoff entities in the Energy sector did not reward shareholders handsomely and appreciated by average and median returns of 13% and -2%, respectively. 5

6 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Jan-13 Apr-13 April 18, 2013 Previous Spinoff transactions in the O&G space We analyzed the recent Spinoff transactions in the Oil & Gas sector: Marathon Oil Corporation (MRO) and Marathon Petroleum Corp. (MPC) in June 2011; and ConocoPhillips (COP) and Phillips 66 (PSX) in May Both transactions suggest that the Spinoffs outperformed their respective parents and the S&P 500 Index with a wide margin. Analysis of share price movements of the Parent (Marathon Oil Corporation - MRO) and previous Spinoff (Marathon Petroleum Corp. - MPC) On June 30, 2011, integrated oil and gas company Marathon Oil Corporation (MRO) spun off its downstream business (refining and marketing business) into a separate entity named Marathon Petroleum Corp (MPC). MPC began trading as a public company on July 1, 2011, and since its listing has significantly outperformed its parent entity. Since listing, MPC has yielded 105%, outperforming both the parent MRO & S&P 500 Index. Share price performance of MRO and MPC since Spinoff when-issued trading date (June 23, 2011) MRO MPC S&P weeks from Spinoff 5.6% 7.1% 5.4% 2 months from Spinoff -16.6% -11.7% -9.4% 3 months from Spinoff -29.2% -23.9% -11.5% 6 months from Spinoff -5.7% -13.0% -1.4% 1 yr from Spinoff -22.5% 9.8% 4.0% Since listing till April 17, 2013 close -0.5% 104.9% 20.9% Source: The Spinoff Report (TSR) Research, Bloomberg, Yahoo finance Share Price Performance of MRO, MPC vs. S&P 500 (rebased to 100) Source: The Spinoff Report (TSR) Research, Bloomberg, Yahoo finance MPC MRO S&P 500 6

7 Apr-12 Jun-12 Jul-12 Sep-12 Nov-12 Dec-12 Feb-13 Apr-13 April 18, 2013 Analysis of share price movements of Parent (ConocoPhillips - COP) and Spinoff (Phillips 66 - PSX) On April 30, 2012, another integrated oil and gas company ConocoPhillips (COP) spun off its downstream business (refining, midstream and petrochemical business) into a separate entity named Phillips 66 (PSX). PSX began trading as a public company on May 1, 2011, and since its listing has significantly outperformed its parent entity. Since listing, PSX has yielded 73.3%, outperforming both the parent COP and S&P 500 Index. Share price performance of COP and PSX since Spinoff when-issued trading date (April 12, 2012) COP PSX S&P weeks from Spinoff -3.1% 2.8% 0.9% 2 months from Spinoff -2.5% -1.5% -4.6% 3 months from Spinoff -3.8% -2.9% -3.8% 6 months from Spinoff 2.5% 30.6% 3.0% Since listing till April 17, 2013 close 4.8% 73.3% 11.9% Source: The Spinoff Report (TSR) Research, Bloomberg, Yahoo finance Share Price Performance of COP, PSX vs. S&P 500 (rebased to 100) Source: The Spinoff Report (TSR) Research, Bloomberg, Yahoo finance PSX COP S&P 500 Does that mean that Spinoff (CST) will perform better, going forward? Unlike the previous Spinoffs with refining & marketing as their businesses, CST is only into the retail sales of motor fuel and convenience merchandise items and services. Though revenue has improved YoY, adjusted EBITDA has improved slightly to $398m in FY12 from $390m in FY11. We believe that post Spinoff, CST might see some selling pressure mainly on account of index holders as CST might not get in the S&P 500 Index post listing. However, from the long-term horizon, we expect CST to perform better as an independent entity, enhancing profitability through optimized motor fuel sales and implementing its growth strategy to drive merchandise sales from its convenience stores. Upcoming Spinoff in the similar line of business Murphy Oil Corp Spinoffs its retail business by mid 2013 TSR earlier, on October 23, 2012, released an Early Wire report on Murphy Oil Corp., saying Murphy BOB has approved a Spinoff of its retail business into a separate entity named Murphy Oil USA by mid Murphy USA s business will consist of retail marketing of petroleum products and convenience merchandise through a large chain of retail gasoline stations, whereas Murphy ex Spinoff will become an independent exploration and production company with principal activities focused in the US, Canada and Malaysia. We believe that the upcoming Murphy Spinoff will also act as a catalyst and may see investor interest in the retail business. 7

8 Business Description Parent Company (ex-spinoff): Valero Energy Corp. (VLO) April 18, 2013 Post Spinoff, VLO will operate the refining business where ~71% of its refining capacity is located at Gulf Coast and the Mid Continent region, which benefits from increasing access to discounted crude feedstock and low-cost energy via natural gas. VLO 4QFY12 earnings hit a seven-year high as the refining company took full advantage of the growing supply of North American crude and stopped buying expensive light, sweet crude imported from overseas, resulting in higher refining margins. VLO revenue improved YOY on the back of higher throughput volumes. Wider crude differential coupled with higher yields from Gasoline and blendstocks has resulted in higher refining margins. This, in turn, led to improved EBITDA margins of 4.9% in FY12 in comparison to 4.3% in FY11. VLO revenue ex-spinoff in $m and EBITDA margins in % 160, % 4.3% 4.9% 5% 140, , , ,124 4% 100, % 3% 80,000 71,862 60,000 55,819 2% 40,000 1% 20, % FY09 FY10 FY11 FY12 Revenue Adj. EBITDA Margin % FY12 refining throughput capacity of 2.8m bpd 16% 18% 55% 11% U.S. Gulf Coast U.S. Mid-Continent North Atlantic U.S. West Coast Source: The Spinoff Report (TSR) Research, Company filings Spinoff Entity: CST Brands, Inc. (CST) Post Spinoff, CST will be one of the largest independent retailers of motor fuel and convenience merchandise items in the US and eastern Canada. Its operations include sale of (i) motor fuel at convenience stores, filling stations and cardlocks, (ii) convenience merchandise items and services at convenience stores, and (iii) heating oil to residential customers and heating oil & motor fuel to small commercial customers. CST geographically diverse operations Source: The Spinoff Report (TSR) Research, Company Presentation 8

9 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 April 18, 2013 CST will have two operating segments: Retail US As of December 31, 2012, CST had 1,032 convenience stores (833 owned and 199 leased) located in Arizona, Arkansas, California, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Wyoming. As of September 30, 2012, CST had 1,027 convenience stores predominantly in the southwestern US and Colorado. CST sells motor fuel primarily under the Valero and Diamond Shamrock brands, convenience merchandise items and other services through convenience stores operated predominantly under the Corner Store name in nine states, with significant concentrations in Texas and Colorado. Retail Canada As of December 31, 2012, CST had 848 retail sites (319 owned and 529 leased) located in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island and Québec. Out of 848 retail sites, 261 are convenience stores, 507 filling stations and 80 cardlocks. Following the separation, CST will have operating revenue of $13.1bn for FY12 with a CAGR of 14.4% during FY09-FY12. The increased revenue is on account of higher motor fuel sales, with a CAGR of 17.3% during FY09-FY12. EBITDA margins from the Retail-US for FY12 have been at 4.1%, higher compared to the Retail-Canada with a margin of 3.2%. CST revenue (Spinoff) in $m and EBITDA margins in % FY12 EBITDA breakup geography - $491m * 24,000 20,000 16,000 12,000 8,000 4, % 3.6% 8,780 10, % 3.0% 12,863 13,135 FY09 FY10 FY11 FY12 Operating revenues Adj. EBITDA Margin % 4% 3% 2% 1% 0% Source: The Spinoff Report (TSR) Research, Company filings, * Segment EBITDA number is before G&A expense & before separation costs Adj. EBITDA margin is on a pro forma basis. We have assumed $30m cost increase as a result of separation for FY09 & FY10. As per company filings, on a pro forma basis, there would be increase in cost of sales of $43m for FY11 & $32m for FY12 as a result of separation. 66% U.S. EBITDA 34% Canada EBITDA Valuation Scenarios Historical share price performance Scenario Analysis - Post Spinoff $65 $60 $55 $50 $45 $40 $35 $30 $25 $20 $15 Source: The Spinoff Report (TSR) Research, Company filings 9

10 Key Highlights Valero Energy (VLO) World s largest independent refiner with current throughput capacity of ~2.8m BPD (excl. Aruba refinery) Post Spinoff, VLO will continue to be the world s largest independent refiner with 16 refineries in the US, Canada, the UK and Aruba, with a combined total throughput capacity of ~3.0m barrels per day (bpd). Excluding the Aruba refinery, which has been closed, the current throughput capacity is ~2.8m barrels per day (bpd). Throughput capacity represents estimated capacity for processing crude oil, intermediates, and other feedstock. Total estimated crude oil capacity is ~2.6mbpd (incl. Aruba) and 2.3mbpd (excl. Aruba). Refinery Location Throughput Capacity (BPD) Total U.S. Gulf Coast Corpus Christi (2 Refinery East & West) Texas 325,000 Port Arthur Texas 310,000 St. Charles Louisiana 270,000 Texas City Texas 245,000 Aruba * Aruba 235,000 Houston Texas 160,000 Meraux Louisiana 135,000 Three Rivers Texas 100,000 1,780,000 U.S. Mid-Continent Memphis Tennessee 195,000 McKee Texas 170,000 Ardmore Oklahoma 90, ,000 North Atlantic Pembroke Wales, U.K. 270,000 Quebec City Quebec, Canada 235, ,000 U.S. West Coast Benicia California 170,000 Wilmington California 135, ,000 Total 3,045,000 Source: The Spinoff Report (TSR) Research, NCT Investor Presentation dated Feb 2013, Company Filings * The operations of the Aruba Refinery were suspended in March 2012 and in September 2012, VLO decided to reorganize the refinery into a crude oil and refined products terminal. VLO intends to maintain the refinery to allow it to be restarted and do not consider it to be abandoned. Focused on export market growth opportunities The US refining industry has undergone a structural change, from being a net importer of refined products to the world market to becoming a net exporter of the products, thereby mitigating the impact of the declining domestic demand. Latin America continues to be the largest US export market followed by the Western Europe. Latin America petroleum demand has been increasing 2.3% per year over the past five years compared to the US demand, which is decreasing 1.7% per year. US Gulf Coast refineries are the largest source of exported products. VLO with ~55% of its refining capacity based in the Gulf Coast region stands to benefit from the exports growth opportunity. As per the management presentation, VLO s share of US exports for refined products has averaged 20% to 25% over the past few years. VLO has export capacity of 225,000bpd of gasoline from its US refineries and 280,000bpd of diesel, which it is looking to expand to over 400,000bpd. We believe that the export market would remain a favorable proposition for the US refineries as excess US capacity, sluggish US demand, cheap crude oil, lower natural gas prices as feedstock, demand growth from Latin America and closure of several Caribbean and European refineries in recent years create a demand for competitive US refined products. Positive outlook for the US refinery industry Most US refining companies operating in the Gulf Coast and Mid-Continent have reported strong FY12 profits on the back of favorable industry dynamics (wider crude differentials). VLO is no exception where its gross refining margins averaged $12.27/b for 4QFY12, up 125% YoY, driven mainly by wider crude differentials. The management indicated that in 4QFY12, it replaced all imported light foreign crude oils with cheaper domestic crude oils at its Gulf Coast and Memphis refineries, which could provide margin uplift in FY13. Additionally, the management has indicated that Gulf Coast system, including Memphis, has the ability to add an additional 125,000bpd of domestic crude throughput, which would increase profitability of VLO in FY13. 10

11 Refining margins continue to improve since FY09, and in FY12, VLO reported 11% increase in refining margins of $1.05 /bbl on the back of margin improvement in the US Mid Continent (a $2.58 per barrel increase) and North Atlantic region (a $3.81 per barrel increase). Segment Region FY10 FY11 FY12 Gr.% (FY11-12) U.S. Gulf Coast Gross refining Margin ($/bbl) % Operating Costs ($/bbl) % Operating income/bbl % Throughput volumes ( 000 BPD) U.S. Mid-Continent Gross refining Margin ($/bbl) % Operating Costs ($/bbl) % Operating income/bbl % Throughput volumes ( 000 BPD) North Atlantic Gross refining Margin ($/bbl) % Operating Costs ($/bbl) % Operating income/bbl % Throughput volumes ( 000 BPD) U.S. West Coast Gross refining Margin ($/bbl) % Total Source: The Spinoff Report (TSR) Research, Company Filings Operating Costs ($/bbl) % Operating income/bbl % Throughput volumes ( 000 BPD) Gross refining Margin ($/bbl) % Operating Costs ($/bbl) % Operating income/bbl % Throughput volumes ( 000 BPD) Earning upside from commissioning of its Hydrocracker plant VLO s new hydrocracker plant at Port Arthur with a capacity of 57,000bpd has commenced operation from December Another hydrocracker plant with a capacity of 60,000bpd is under construction at the Valero St. Charles refinery, and it remains on schedule to become operational during the second quarter of Hydrocrackers were designed to capitalize on high crude oil and low natural gas prices, and produce primarily diesel to meet growing demand in both domestic and export markets. We believe that VLO is well positioned to deliver earning upside in FY13 from the first full-year operation of the Port Arthur hydrocracker and start of another hydrocracker plant at St. Charles scheduled for 2QFY13. The management expects an incremental EBITDA of $520m from the Port Arthur hydrocracker project and $380m from the St. Charles project. Cash return to shareholders VLO has increased quarterly dividend to $0.20 per share in 1QFY13 (or $0.80 per share on an annualized basis) from $0.05 per share in 2QFY11. It bought 10.6m shares for $281m in FY12 and 16.7m shares for $347m in FY11. VLO expects significant contributions of free cash flow from reduced capital spending and earnings from major capital projects in FY13, which it expects to return cash to shareholders through a dividend and share buyback (bought 6m shares for $268m so far in 2013 as per the VLO presentation on Howard Weil Energy Conference dated March 20, 2013). Key Risks Narrowing crude differential, Compression in refining margins, and Worsening global economic environment resulting in demand decline for US refined products or excess industry refining capacity. Highly regulated refining industry, which is subject to unforeseen costs - VLO estimates FY13 RFS compliance cost to be between $500m and $750m compared to costs of $200m -$250m in FY12. 11

12 Valuation Summary VLO (ex-spinoff) We recommend a Buy rating on VLO (ex-spinoff), with a one-year price target of $ This implies an upside potential of 17.0% from the when issued price of $35.19 per share. We are positive on the VLO refining business on the back of wide crude differential and export market growth opportunity and expect to have strong refining margins on the back of strategic location in the Gulf Coast. VLO valuation (ex- Spinoff) based on relative method Particulars Amount ($ m) FY13E EBITDA (refining business) 6,409 FY13E EV/EBITDA (refining business) 4.25 EV (refining business) 27,239 Add: 20% stake in CST Brands ( target value of $2,342m) 468 Total EV 27,708 Debt calculation Pro forma debt as per Dec 31,2012 adj. for CST brands 7,044 Less: $180m debt paid in Jan 2013 (180) Total debt 6,864 Cash calculation Pro forma cash as per Dec 31,2012 adj. for CST brands 1,662 Add: Cash to be received from Spinoff transaction 1,050 Less: Cash paid on Tax liability from CST Separation in Canada (300) Less: $180m debt paid in Jan 2013 (180) Total cash 2,232 Net Debt 4,632 Others 63 Total Equity value 23,013 Diluted shares Target value per share $41.16 When issued price ( April 17 close) $35.19 % Upside 17.0% Source: The Spinoff Report (TSR) Research, Company filings Based on the peer group relative table on the refining & marketing companies, we believe that VLO should trade at a FY13E EV/EBITDA of 4.25x. Parent Peer Group Valuation VLO (ex-spinoff) Refining companies Company (BBG) Mcap in $m EV in $m EV/EBITDA P/E E 2014E E 2014E Holly Frontier Corp (HFC) 9,429 8, x 3.5x 4.1x 5.4x 6.7x 8.4x Tesoro Corp (TSO) 6,647 7, x 3.5x 3.2x 7.2x 8.3x 7.9x CVR Energy (CVI) 4,082 4, x 3.3x 3.6x 6.8x 8.2x 9.1x Western Refining (WNR) 2,579 2, x 2.9x 3.4x 5.8x 6.9x 7.7x Marathon Petroleum Corp (MPC) 25,692 24, x 3.5x 3.7x 7.9x 7.3x 7.4x Delek(DK) 2,063 2, x 3.7x 3.9x 7.6x 7.2x 9.1x Peer Group Average 3.5x 3.4x 3.6x 6.8x 7.4x 8.3x Source: The Spinoff Report (TSR) Research, Bloomberg Comps valuations are as on April 15, 2013 close 12

13 Key Highlights CST Brands CST growth strategy is to create value by optimizing fuel offering and pricing throughout its retail system, continuing to expand its private label product offerings, pursuing desirable opportunities to construct new convenience stores and updating its existing convenience stores, and leveraging the supply chain in future expansions and acquisitions. Geographically located in attracted Southwestern US and Eastern Canada markets Post Spinoff, CST will operate with ~ 1,900 sites, making it one of the largest independent retailers of fuel and convenience merchandise in North America. CST sites are geographically diverse: Southwestern US (55%) and eastern Canada (45%), and are approximately 60% owned by CST brands. CST is competitively positioned in targeted regions that offer high growth potential. Around 61% of its US sites are in Texas, which has a relatively favourable economy and attractive demographics for convenience stores. The Texas economy has fared better than many other parts of the US, partly supported by a solid economy, a relatively stable housing market, and strong population growth and job creation. In terms of the segment business, ~60% of the total operating revenue (FY12) is accounted by Retail-US, while 40% is from Retail-Canada. However in terms of gross profits, Retail-US forms 64%, while Retail-Canada constitutes the rest 36%, indicating that Retail-US commands better margins of 9.1% compared to Retail- Canada of 7.9%. About 84% of the total operating revenue and 49% of gross profit are sourced from motor fuel, while ~16% of the total revenue and 51% of gross profit come from merchandise and others. Gross margins on motor fuel were ~5.0% while those on merchandise were ~29.6% for FY12. Margins from Retail-US have witnessed an improvement in FY12 on YoY basis while those from Retail-Canada have seen a fall on both motor fuel and merchandise on YoY basis. US Convenience stores opened (reflected as NTIs below), acquired and closed or divested for the last 3 years Particulars FY10 FY11 FY12 Number at beginning of period NTIs (New-To-Industry) Acquired Closed or divested (7) (4) (6) Number at end of period Source: The Spinoff Report (TSR) Research, Company Filings Also, CST Canadian retail sites are concentrated in Québec and the eastern Canadian provinces, which have certain governmental regulations on motor fuel pricing that tend to reduce margin volatility and protect against below-cost selling. Canada retail sites opened (reflected as NTIs below), and closed or divested for the last 3 years Particulars FY10 FY11 FY12 Number at beginning of period NTIs and new dealers Closed/divested/de-branded (36) (41) (41) Number at end of period Source: The Spinoff Report (TSR) Research, Company Filings Most of these retail sites are located in metropolitan areas, which have high concentrations of consumers and daily commuters, giving an advantage to CST to engage the consumer with the Corner Store brand. 13

14 Remodelling of its existing sites and expanding its NTI stores to fuel growth To support its sales growth strategy, CST in the US is looking to expand through new site construction of Newto-Industry (NTI) convenience stores. CST typical NTI convenience store incorporates an expanded branded or proprietary food offering and a car wash. CST NTI convenience stores are typically larger than the average size of VLO convenience stores and generate more in merchandise sales. We believe this is a positive move as setting up new NTI stores with a primary focus on Texas, which accounts for 60% of the US sites, should result in higher sales for CST. In the Canada region, CST is looking to tap the opportunities that include redevelopment of older properties and NTI opportunities focused in growing urban centers or along major highways, including the addition of NTI cardlock locations. CST expects 20 or more NTI stores in 2013 to fuel growth. Stable Business Profile CST retail business is relatively stable with consistent cash flow generation every year compared to the parent refining business where margins are affected by volatile crude oil prices and demand for gasoline and other petroleum products. Also, CST will have long-term motor fuel supply agreements with VLO, providing stability to CST motor fuel supply. CST cash flows have been strong over the last three years and have generated positive cash flow from operations during the same period. CST has generated an average $330m cash flow from operations, has incurred an average capex of $130m and transferred average $200m cash to Valero over the last three years. In addition, CST acquired 29 convenience stores in Little Rock and Hot Springs, Arkansas in 2012 for a total consideration of $61m. We believe that post Spinoff, CST won t have to transfer the surplus cash to Valero and will have sufficient cash to meet its growth opportunities, particularly in the merchandise segment (organic/ acquisition) and enhance return for shareholders. CST cash flow generation vs Capex in last 3 years FY10 FY11 FY12 Operating Income Cash flow from Operations Capex CST Segment break up 12, % 5% 10, % 4.0% 4.1% 4% 8, % 3.2% 3% 6,000 2% 4, , % 0 0% FY10 FY11 FY12 Revenue - U.S. Revenue - Canada EBITDA Margins - U.S. EBITDA Margins- Canada Source: The Spinoff Report (TSR) Research, Company filings Operating Income is on a pro forma basis after accounting for the separation costs. Strong distribution network and merchandising initiatives to support the acquisition strategy CST plans to pursue acquisition opportunities of smaller chains (50 or fewer convenience stores) in existing and contiguous markets with overall market characteristics similar to its existing markets. In Canada, CST plans to focus on expanding its dealer network through acquisition, particularly in rural markets. Its ability to supply a large variety of proprietary offerings coupled with expected long-term motor fuel supply agreements with Valero provide it a strong competitive advantage in the market. CST has a strategic alliance with Core-Mark International, Inc. (Core-Mark) a leading distributor of groceries, tobacco and fresh foods to manage and operate its own distribution center in Texas supplying over 570 of its convenience stores in the US supporting the development and growth of its private label packaged goods and fresh food programs. In Canada, for grocery supply, CST has an agreement with Sobeys Québec, Inc., which is a leading grocery wholesale distributor in eastern Canada providing efficient distribution services. CST continues to expand its private label products throughout its retail system to drive increased merchandise gross margins. CST has a proprietary prepared food offering in ~83% of its retail sites in the US and ~16% of its retail sites in Canada. We believe that its strong distribution network coupled with merchandising initiatives would auger well for CST to expand its business and would support the growth through acquisition. 14

15 Performance-based incentives pay for CST management To head the retail business, Ms. Kimberly S. Bowers was appointed as the Chief Executive Officer and President of CST effective January 1, She has spent 21 years in the legal profession, including the last 15 with Valero (previously served as the Senior Vice President and General Counsel of Valero since April 2006). As per the VLO management, Ms. Bowers has a lot of experience in mergers and acquisitions, and expanding lines of business, which will help the retail business. One of the positives is that a significant part of executives compensation, including that of CEO, is linked to performance, which, we believe, will enhance the executive performance and indirectly the company performance. Kimberly S. Bowers (CEO) will be getting almost double-fold growth in the base salary and her target bonus % of base salary has also increased to 136% for FY13 from 80% for FY12. Additionally, she would be eligible for the retention stock awards in FY13, which will spur the CEO to perform better. The total target compensation for FY13 for Ms. Bowers for basic pay vs. variable pay is in the ratio of 20:80. Though the VLO management has elected Mr. Charles Adams (Senior Vice President-Marketing of CST) and Anthony Bartys (Senior Vice President and Chief Operating Officer of CST), with considerable experience in the retail operations and marketing, we still believe that election of a leader either internally / externally from the retail business to provide more strategic direction and growth roadmap for CST would have served the company better. Key Risks CST is significantly impacted by the gross margins it receives on the motor fuel sales. These gross margins are commodity-based, change daily and are volatile. Gross margins can change rapidly due to many factors including the crude oil price (which impacts the wholesale price it pays for the motor fuel purchase), interruptions in supply caused by severe weather, severe refinery mechanical failures for an extended period of time, and competition in the local markets. 15

16 Valuation Summary CST (Spinoff) We recommend a Hold rating on CST (Spinoff), with a one-year price target of $ This implies an upside potential of ~6.8% on base case from the when issued price of $28.49 per share. Our upside is based on the relative valuation on EV/EBITDA multiple. We believe that post Spinoff, CST performance should improve on the back of management focus on enhancing profitability through optimized motor fuel sales and driving growth through convenience stores sales. On the bull case scenario, we see a one-year price target of $35.36 which implies an upside potential of ~24.1% from the when issued price of $28.49 per share. We have valued CST on the basis of average EV on FY12 and FY13E numbers. On FY12 numbers, we have valued CST at 8.5x FY12 EBITDA of $398m, resulting into an enterprise value of $3,383m. On FY13E numbers, we have valued CST at 8.0x FY12 EBITDA of $415m, resulting into an enterprise value of $3,320m. The average of FY12 and FY13E numbers results into an EV of $3,352m. After deducting net debt of $1,010m, the target market cap of CST should be $2,342m. We have considered the total outstanding shares of 76.96m to arrive at a per share value of $ Relative valuation of CST (ex-spinoff) Particulars Amount ($ m) EV/EBITDA Multiple FY12 EBITDA 398 FY12 EV/EBITDA 8.5x Total EV 3,383 FY13E EBITDA 415 FY13E EV/EBITDA 8.0x Total EV 3,320 Average EV based on FY12 and FY13E numbers 3,352 Net debt 1,010 Mkt Cap 2,342 Shares outstanding Target value per share $30.42 When issued price ( April 17 close) $28.49 % Upside 6.8% Source: The Spinoff Report (TSR) Research, Company fillings Competitors Convenience store industry in the US is highly competitive. CST competes with other convenience store chains, independently-owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores, dollar stores, club stores and hypermarkets. Based on the peer group relative table on the convenience stores business, we believe that CST should trade at a FY12 EV/EBITDA of 8.5x and FY13E EV/EBITDA of 8.0x. Peer Group Valuation Retail companies Convenience Stores Company (BBG) Mcap in $m EV in $m EV/EBITDA P/E E 2014E E 2014E Susser (SUSS) x 8.6x 7.7x 22.6x 24.4x 18.1x Casey's(CASY) x 7.9x 6.9x 19.0x 16.4x 14.1x Alimentation Couche Tard (ATD/B) x 9.1x 8.3x 17.7x 15.1x 13.4x Pantry (PTRY) x 5.2x NA 55.0x 16.8X NA Peer Group Average 8.5x 7.7x 7.6x 28.6x 18.2x 15.2x Source: The Spinoff Report (TSR) Research, Bloomberg Comps valuations are as on April 15, 2013 close. 16

17 Technical Shareholdings Valero Energy Corporation (VLO) Pre Spinoff April 18, 2013 Index: Valero Energy is listed on the New York Stock Exchange under the symbol VLO. It is a part of major indices such as the S&P 500, Dow Jones US and S&P 1500 Composite. It is also traded on the S&P 500 subclasses, including S&P 500 Value, S&P 500 Energy Sector Index GICS Level 1, S&P 500 Oil & Gas Refining & Marketing Sub Industrial Ix GICS Level 4 and S&P 500 Oil & Gas and Consumable fuels Industrial Group. Top Shareholders: VLO s top 10 shareholders being institutional investors cumulatively hold 36.4% shares of the company. State Street is the largest shareholder with a stake of 6.46% or 35.8m shares, followed by State Blackrock and Vanguard Group, Inc. with a stake of 6.38% and 4.71%, respectively. Prominent shareholders Name Current holding % O/s Filing date State Street 35,795, % 16-Apr-13 Blackrock 35,343, % 31-Dec-12 Vanguard Group, Inc. 26,116, % 31-Mar-13 FMR LLC 23,068, % 31-Dec-12 Wellington Management Co. LLP 16,615, % 31-Dec-12 T. Rowe Price Associates 16,068, % 31-Dec-12 Bank of New York Mellon Corp. 14,361, % 31-Dec-12 JP Morgan 12,950, % 31-Dec-12 Ameriprise Financial, Inc. 11,678, % 31-Dec-12 Investec Asset Management Ltd. 9,751, % 31-Dec-12 Source: The Spinoff Report (TSR) Research, Bloomberg Shareholding Change: Over the last six months (Jun-Dec 2012), VLO s top 10 shareholders witnessed a net buying of 18.7m shares, with a net purchase of 19.9m shares made during June to September 2012 (3Q12) and a net sale of 1.3m shares during September to December 2012 (4Q12). In 3Q12, the notable buyers were Wellington Management Co. LLP, JP Morgan and FMR LLC, who purchased 9.6m shares, 4.6m shares and 4.0m shares, respectively. In 4Q12, the notable sellers were FMR LLC and Wellington Management Co., who sold 5.3m and 4.3m shares, bringing their current stake in the company to 23.07m and 16.6m shares, respectively. Further, on April 16, 2013, State Street purchased additional 9.5m shares and moved up to the top position from second in the top 10 shareholders list. Shareholder momentum Name State Street Current holding 35,795,587 (16-Apr-13) Recent changes Holding as an Dec 31, 2012 Change in 4Q12 Holding on Sept 30, 2012 Change in 3Q12 Holding on Jun 30, ,537,518 26,258,069 (634,454) 26,892, ,501 26,863,306 Blackrock 35,343,735 35,341,665 4,270,175 31,071,490 53,420 30,562,989 Vanguard Group, Inc. 26,116,720 (31-Mar-13) 101,971 26,014,749 1,011,831 25,002,918 1,037,230 23,965,688 FMR LLC 23,068,868 23,068,868 (5,331,462) 28,400,330 4,010,802 24,389,528 Wellington Management 16,615,477 16,615,477 (4,297,657) 20,913,134 9,649,786 11,263,348 T. Rowe Price Associates 16,068,879 16,068,879 (74,270) 16,143,149 (912,360) 17,055,499 Bank of New York Mellon 14,361,537 14,361,537 (74,526) 14,436,063 (240,178) 14,676,241 JP Morgan 12,950,581 12,950,581 1,183,871 11,766,710 4,619,126 7,166,884 Ameriprise Financial, Inc. 11,678,592 11,678,592 1,210,189 10,468, ,173 10,156,230 Investec Asset Mgmt 9,751,591 9,751,591 1,453,266 8,298, ,691 7,397,544 Net Activity 9,639,489-1,283,037 19,942,191 Source: The Spinoff Report (TSR) Research, Bloomberg 17

18 TSR View Over the last six months (Jun-Dec 2012) or after the Spinoff announcement on July 31, 2012, most of the prominent shareholders were involved in buying activity rather than selling; an indication that they believe the proposed Spinoff would be beneficial for VLO shareholders. Investor Type: VLO has 284 Core Growth investors and 162 GARP investors, who hold 20.57% and 12.42% stake in the company respectively, which signifies sustainability and consistent growth over the long term. Additionally, Index funds hold a stake of 20.11%, which indicates investor confidence in the performance of the company. Based on the core eligibility criteria of S&P 500 and S&P 1500 Composite (consists of S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600), we expect VLO with an expected implied market capitalization of $20bn to remain on both the indices, which would be a good sign for index holders. The eligibility criteria of indices for stock inclusion are as follows: S&P market capitalization of $4.0bn or more S&P Mid-Cap market capitalization of $1.0bn to $4.4bn S&P Small-Cap market capitalization of $300m to $1.4bn Investor style Holders Shares held % o/s Core Growth ,004, Index ,432, GARP ,832, Core Value ,437, Deep Value 46 40,499, Hedge Fund ,943, Broker-Dealer 51 17,601, Growth 60 8,801, Source: The Spinoff Report (TSR) Research, Thomson 18

19 Insiders Overview Insider Activity Over the last year, VLO insiders witnessed open market sale transactions of 1.01m shares. Amongst them, William R. Klesse (CEO) sold 372,175 shares during December 2012 to March 2013 in the trade price range of $33.49 to $ Edwards S. Eugene (EVP) sold 40,000 shares at an average trade price of $45.32 in February 2013 and 59,685 shares at an average trade price of $44.12 in January Michael S. Ciskowski (CFO) sold 110,000 shares at an average trade price of $33.96 in December Open market insider transactions during last one year Name Designation No. of shares traded Average trade price ($) Transaction date/ month Jerome D Choate Director (10,000) Mar-13 Susan Kaufman Purcell Director (2,500) Feb-13 Ronald K Calgaard Director (18,789) Feb-13 William R Klesse Edwards S Eugene Chief Executive Officer EVP (96,175) Mar-13 (200,000) Feb-13 (68,000) Jan-13 (108,000) Dec-12 (40,000) Feb-13 (59,685) Jan-13 Donald L Nickles Director (10,000) Feb-13 Kimberly S Bowers Robert G Marbut General Counsel Director (80,530) Dec-12 (18,750) Nov-12 (3,750) Oct-12 (3,000) Sep-12 (11,650) Aug-12 (5,600) Jul-12 (14,250) Mar-12 Michael S Ciskowski Chief Financial Officer (26,102) Feb-13 (110,000) Dec-12 Joseph W Gorder EVP (70,575) Dec-12 Susan Purcell Kaufman Director 19 (4,250) Dec-12 (1,700) Aug-12 (10,345) May-12 Ruben M Escobedo Director (11,200) May-12 Bernier Jean EVP (29,000) Mar-12 Net Activity (1,013,851) Source: The Spinoff Report (TSR) Research, Thomson, Bloomberg TSR View Our view on the insider activity is neutral given that though insiders witnessed selling transactions since last one year, they still hold a stake in the company. As per market news, Joseph W. Gorder (COO), who can be the next CEO of VLO though not confirmed, has not been involved in open market sale transactions since last three months and is still holding 143,076 shares of the company, which can be viewed as a positive sign for investors.