Tesoro Beats Top and Bottom Lines - Analyst Blog


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Independent refiner Tesoro Corporation ( TSO ) declared upbeat first-quarter 2012 results, reflecting strong operations and efficient execution of strategic initiatives along with benefits from high-return capital programs.

The company reported earnings per share of 39 cents, breezing past the Zacks Consensus Estimate of 27 cents. However, comparing year over year, the result dropped 47.3% from 74 cents.

The company reported revenue of $7,820.0 million for the three-month period, up 19.8% from the prior-year figure of $6,526.0 million. The result was 14.7% above our projection.

Segmental Analysis

Refining: Tesoro's Refining segment posted quarterly operating income of $194 million, against $303 million in the year-earlier quarter. The decline was due to turnaround activity in California.

Retail: The Retail unit experienced an operating loss of $4 million during the three-month period, compared with a profit of $2 million in the first quarter of 2011.


Total refining throughput averaged 529 thousand barrels per day (MBbl/d) in the first quarter, down from 561 MBbl/d in the year-ago quarter, aided by weak performances in some of the regions.

California (Golden Eagle and Los Angeles) registered a year-over-year decline of 23.8%, while the Pacific Northwest (Alaska and Washington) output shot up 14.8%. Throughput in the company's Mid-Pacific (Hawaii) region decreased 2.9%, while that of the Mid-Continent (North Dakota & Utah) improved 8.3%.

Refining Margins

Gross refining margin plunged 15.2% year over year to $12.15 per barrel. In terms of different regions, refining margin was down approximately 52.1% in California at $7.98 per barrel and 3.2% in the Pacific Northwest at $12.96 per barrel.

In the Mid-Pacific, gross refining margin was $2.07 per barrel versus a negative figure of $3.05 per barrel in first quarter 2011. The Mid-Continent region experienced 13.2% year-over-year growth in the gross refining margin at $23.51 per barrel.

Realized Costs & Prices

Manufacturing costs before depreciation and amortization decreased 4.8% from the year-earlier level to $4.97 per barrel, in keeping with Tesoro's stated objectives of reducing operating costs and increasing throughput rates.

Total refined product sales during the quarter averaged 657 MBbl/d, up 6.8% year over year. The average price realized on product sales increased 12.5% year over year to $127.11 per barrel. Average cost per barrel was also up 17.8% from the first quarter of 2011 at $117.75 per barrel.

Capital Expenditure & Balance Sheet

During the quarter, Tesoro's total capital spending was $102 million (excluding retail acquisition), of which 89% was targeted toward the refining segment. Turnaround spending for the year was $126 million.

As of March 31, 2012, Tesoro had $710 million cash on hand and total debt of $1,674.0 million, representing a debt-to-capitalization ratio of 29.2%.


For the second quarter, total throughput is projected at around 580 MBbl/d.

Tesoro expects capital expenditure for 2012 to be around $670 million, together with a turnaround spending of around $300 million.


During the quarter, Tesoro completed the acquisition of 49 Albertson's Fuel Express retail stations from Supervalu Inc. ( SVU ). With total fuel sales of about 5 million barrels per day, the facilities are spread across Washington, Oregon, California, Nevada, Idaho, Utah and Wyoming.

Our Recommendation

San Antonio, Texas-based Tesoro enjoys the scale and diversification benefits afforded by its portfolio of seven refineries. . In the near term, the company stands to benefit from management's focus on balance sheet improvement and investment strategies.

However, Tesoro remains exposed to the risk of a tardy U.S. economic growth and weak product demand. Its lack of geographic diversification and excessive dependence on the West Coast market will further limit the ability to generate positive earnings surprises. Hence, we expect Tesoro shares to perform in line with the broader market and maintain our long-term Neutral recommendation.

Tesoro currently retains a Zacks #3 Rank (short-term Hold rating).

SUPERVALU INC (SVU): Free Stock Analysis Report
TESORO CORP (TSO): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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