Analyst Actions: Credit Suisse Raises Ests For Tesoro Corp, Phillips 66; TSO Up Near 3%, PSX Hits 52 Week Highs

By Staff,

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Bottom Line: Although margins are seasonally at their weakest currently, Tesoro Corporation ( TSO ) and Phillips 66 ( PSX ) Analyst Days should reconfirm some key attractions of the US refining/chemical industry - accessing cheap crudes, low energy costs, high multiple mid-stream growth opportunities, and cheap ethane feedstock. The group trades on low mid-cycle EV/EBITDA multiples, looks attractive in HOLT and should generate strong free cashflow to provide for shareholder returns. Investors are nervous about a transition from "supernormal" WTI-Brent spreads to a new normal as pipeline infrastructure is added through 2013-14. We favor management teams that can "force valuation" during this adjustment period.

TSO is up nearly 3% while PSX is 3.5% higher and has hit new 52 week highs.

PSX Expectations (even if they jumped the gun on divs and buybacks): As we laid out in our Jumping on the MLP Bandwagon, PSX has substantial non-refining value on which to throw the spotlight. Importantly, whereas gasoline demand in the US has been shrinking, global chemical demand and the logistic opportunity in shale allow PSX to deliver a high multiple combination of growth AND free cash generation. Specifically, (1) we estimate that PSX can deliver around $2bn of EBITDA by 2015 from its logistics businesses (including $850m from the R&M segment). This logistics EBITDA would rise beyond 2015 as NGL prices normalize and due to underlying growth opportunities. Every additional $100m of logistics EBITDA can be worth up to $1.4/sh. (2) Our mid-cycle chemical "see through" EBITDA (including associates) is $4.4bn once the Gulf Cracker is on-stream with a DCF value of $18/sh. (3) PSX's refining business has a good share of higher multiple Mid-Con EBITDA (65%) and we expect PSX to provide an update on capturing higher volumes of cheap domestic crude across its system which could lead to EBITDA upgrades. (4) Free cash generation is strong, supportive of a higher dividend payout (raised by 25% on Friday) and continued share repurchases (an additional $1bn announced - we raise our EPS forecasts to reflect this). Our theoretical value is $77/share.

TSO Expectations: TSO has delivered strong self-help EBITDA improvement over the last several years from high margin quick hit projects and there is still EBITDA self-help to come to help offset WTI-Brent spreads. The Carson refinery acquisition would be substantially EBITDA accretive, once the FTC has ruled. We will look for an update of any additional quick hit projects, and the ability to capture additional advantaged crude (As a placeholder we raise our EPS by 2% for processing 20 KBD Canadian heavy by rail). We don't expect additional dividend/buybacks until after Carson has closed and debt-cap has fallen below 30%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing Commodities
Referenced Stocks: PSX , TSO

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