We are maintaining our long-term Neutral recommendation on
), an independent refiner and marketer of refined petroleum
products in the western U.S.
The San Antonio, Texas-based company is characterized by a
line-up of superior refineries, crude oil supply expansion plans
and accretive acquisitions. However, we remain apprehensive about
the volatility of the refining business and weak product
We believe that Tesoro enjoys a solid long-term competitive
position in the supply-constrained California market, owing to the
benefits afforded by its portfolio of seven refineries. Hence,
Tesoro remains better positioned to navigate through the current
cyclical downturn than most of its peers.
Looking into the coming quarters, management is paying greater
attention to improving business processes, reducing operating
costs, enhancing the integration of the refining portfolio and
investing in organic growth.
Tesoro is currently involved in a number of high-return projects
that are expected to be cost effective. These projects will not
only boost Tesoro's competitive position among its peer group, but
will also provide significant earnings and cash flow growth
We also appreciate Tesoro's strategy of boosting its crude oil
supply via rail from the Bakken Shale play in North Dakota to its
refinery in Anacortes, Washington (expected to be completed in
third quarter 2012). This increased supply capacity will enable the
company to accelerate drilling activities and drive higher
production in the Bakken Shale as well as strengthen its strong
foothold in the energy sector, through the enhancement of its
refining and marketing business.
However, with domestic refining fundamentals remaining weak, we
are concerned about Tesoro's performance in the near-to-medium
term. The lackluster economic growth in the U.S. poses as a major
threat for the domestic refiners, limiting their upside
We also believe that high unemployment in California - Tesoro's
core business region - and excess refining capacity in the U.S.
will continue to weigh on the company's margins.
Additionally, Tesoro exhibits a weak geographic diversification
as it lacks exposure to the other refining regions in the country.
The company's West Coast centric operating footprint and heavy
dependence on certain market act as major liabilities.
Given these factors, we expect Tesoro shares to perform in line
with the broader market. Tesoro operates in the 'Oil & Gas
Refining & Marketing' sector with other players such as
Valero Energy Corp.
Western Refining Inc.
TESORO CORP (TSO): Free Stock Analysis Report
VALERO ENERGY (VLO): Free Stock Analysis Report
WESTERN REFING (WNR): Free Stock Analysis
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