Tesoro Petroleum (TSO)

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See all Bulls Reasons Bulls: Reasons To Buy Great indications on the balance sheet in June quarter 2008 100% agree Great indications on the balance sheet in June quarter 2008 TSO has seen its revenues peaking at around $5.6 billion on a quarterly basis. For the June 2008 quarter, expectations are for the company to have registered approximately $5.8 billion, in line with $5.6 billion from last year in the same quarter. On a yearly basis,... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Tesoro Overhead Too High! 0% agree Tesoro Overhead Too High! Tesoro has to much overhead in its headquarters. They are staffed as if they were a Valero. Until they cut the staffing in San Antonio stay away from this stock because they are not serious about reducing costs but merely hoping margins change in the near future. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Tesoro Corporation engages in refining and marketing petroleum products in the United States. It operates in two segments, Refining and Retail. Refining (accounted for 93% of the company's total 2006 operating income) and Retail (7%). The Refining segment manufactures and sells gasoline and gasoline blend-stocks, jet fuel, diesel fuel, and other refined products to customers, primarily in the mid-continental and the western U.S. This segment also markets liquefied petroleum gas, petroleum coke, and asphalt.

The Refining segment produces refined products, including gasoline and gasoline blendstocks, jet fuel, diesel fuel, and heavy fuel oils for sale to commercial customers in the western and mid-continental United States. This segment also manufactures liquefied petroleum gas, petroleum coke, and asphalt. As of December 31, 2007, the company operated 7 refineries with a combined capacity of approximately 658,000 barrels per day.

The Retail segment sells gasoline and diesel fuel through company-operated retail stations and third-party branded jobber/dealers in the western and mid-continental United States to wholesale and retail customers, as well as commercial end-users. Its retail-marketing system included 911 branded retail stations operated under the brands Tesoro, Shell, Mirastar, and USA Gasoline. The company was founded in 1968 as Tesoro Petroleum Corp and changed its name to Tesoro Corporation in November 2004. Tesoro Corporation is based in San Antonio, Texas.

[edit] Business and Financials

TSO's balance sheet currently has a cash cushion of just over $41 million. The debt they carry though, amounts to over $2 billion. The firm's EBITDA is $930 million on a trailing twelve month basis.

Excluding the recently acquired Shell's Los Angeles refinery that has a 100,000 Bbl/d in refining capacity, the company owns and operates six refineries, with a combined crude oil processing capacity of 563,000 barrels per day (Bbl/d), located in California (approximately 30% of the company's total refining capacity is located in California), Alaska (13%), Washington (19%), Hawaii (17%), North Dakota (11%), and Utah (10%). Tesoro's geographically focused refining business has made it the second largest refiner in the western U.S., just behind Chevron. More than half of Tesoro's refining capacity is capable of processing heavier grades of crude oil, which sell at a discount to lighter crudes. The Retail segment distributes motor fuels to wholesale and retail customers, as well as to commercial end-users through a network of 460 branded retail outlets primarily, under the Tesoro' and Mirastar' names.

Since the late 1990s, Tesoro has remained focused on strengthening its portfolio of refining and marketing assets and divesting non-core businesses. Through a series of focused acquisitions over the last few years, the company significantly enhanced its market position, particularly in the western U.S. The company acquired its Hawaii and Washington refineries in 1998, its North Dakota and Utah refineries in 2001, and its California refinery in 2002. These transactions helped boost Tesoro's refining capacity from approximately 72,000 Bbl/d to the current level of 563,000 Bbl/d, and made it the second largest refiner in the western U.S. As part of this repositioning program, the company exited the oil and gas exploration and production business in 1999 and sold its marine services assets in 2003.

Having primarily used debt to fund its acquisition program, Tesoro's debt load increased from approximately $400 million in 1999 to about $2 billion at the end of 2002. This increased its debt-to-capitalization ratio to 69% at the end of 2002 from about 40% in 1999. In order to strengthen the balance sheet, management made debt reduction a top priority. Proceeds from asset sales and, more importantly, strong cash flows as a result of the robust refining environment, helped the company pre-pay substantial amounts of debt. As a result, Tesoro's debt-to-capitalization ratio dropped to approximately 29% by the end of first quarter of 2007. At the time of closing the Los Angeles refinery acquisition, debt-to-capitalization ratio was approximately 50%, as the company paid nearly half of the purchase price by using debt. Debt-to-capitalization ratio, however, subsequently came down to approximately 33% by the end of September this year.

With Tesoro's financial health largely restored, management was expected to pursue further growth opportunities. But management's history of mistimed acquisitions did not inspire much confidence in the market. Tesoro shares persistently traded at a discount to other independent refining peers, largely reflecting this background. With its recent acquisition of Shell's 100,000 Bbl/d Los Angeles refinery, those concerns have largely been put to rest.

[edit] Trends and Forces

[edit] Acquisitions

The stock performed strongly following the acquisition announcement due to the market's appreciation of the acquired asset's strategic fit and the deal's attractive metrics. The acquisition brought in a 100,000 Bbl/d refinery and a 42,000 bpd refined products terminal located south of Los Angeles, along with approximately 278 Shell-branded retail stations located throughout Southern California. The purchase consideration of $1.82 billion was financed by a mix of cash-on-hand (approximately $820 million) and borrowings ($1 billion).

This acquisition fits well with the company's West Coast focused operating base and provides for meaningful synergy capture and growth opportunities by optimizing the output of its refineries to maximize the production of clean fuel products for the California market as well as through its crude oil purchasing and unique shipping logistics. The company expects to realize annual recurring synergies of approximately $100 million from the deal. Concurrent with this transaction, the company also entered into an agreement with USA Petroleum to acquire 138 retail stations primarily located in California and a terminal located in New Mexico for $285 million, further consolidating the company's position in the western U.S. retail market.

Management is paying greater attention to improving business processes, reducing operating costs, enhancing the integration of the refining portfolio, and investing in organic growth. A major organic growth project presently under implementation is the modification/expansion of Golden Eagle's coker unit. The project will modify the existing fluid coking unit into a delayed coking unit, which will enable the company to comply with the terms of an abatement order to lower emissions while also enhancing the refinery's capabilities in terms of reliability, lengthening turnaround cycles, and reducing operating costs. The project is expected to be substantially completed during the first quarter of 2008 at a cost of approximately $475 million to $525 million. Management expects to generate approximately $100 million in annual EBITDA from this project.

[edit] Research and Development

The company is also implementing a number of smaller projects designed to increase the Washington refinery's sulfur handling capabilities and utilization levels, which will enable the refinery to process a greater percentage of sour grade crude. These projects are estimated to be completed shortly at a cost of approximately $34 million. The company's capital spending plan also included a 10,000 Bbl/d diesel desulfurizer unit at its Alaska refinery, which was completed in May this year at a cost of approximately $55 million. Management guided towards capital expenditures of $900 for the year (including refinery turnaround and other maintenance costs of approximately $125 million), up from $650 million guided earlier. The increase includes $125 million for capital and turnaround spending associated with the recently acquired Los Angeles refinery and $100 million relating to advancement of spending planned in 2008 on the Golden Eagle coker modification project to this year. Given our positive refining margin outlook, we estimate that the company will comfortably fund its expansion plans from internally generated cash.

Tesoro shares have pulled back significantly in recent days than its peer group's average pullback the weakness is primarily due to weak near-term macro fundamentals beyond the company's control. The impact of the margin weakness was compounded by higher than expected feedstock costs due to new cyclical highs for crude oil prices. The West Coast market was the heaviest hit by this turn of events, as evident from TSO's weak performance in recent days. The medium to long-term outlook, however, remains very favorable provided the broader economy can shake off housing-related worries. The outlook is particularly positive for the West Coast market, where Tesoro remains well entrenched.

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