Tesoro Misses, Margins Improve - Analyst Blog

Independent refiner and marketer of refined petroleum products Tesoro Corp. (TSO) reported weaker-than-expected fourth quarter and full-year 2010 results. The company experienced a net loss per share (excluding one-time items) of 13 cents, wider than our projected loss of 7 cents but improved considerably from the net loss of 99 cents in the prior-year quarter.

Tesoro reported a net loss of 21 cents per share for full-year 2010 versus a loss of $1.01 per share in 2009.

The quarter's performance was affected by higher cost of sales and operating expenses along with lower throughput. However, strong refining margins and growing demand for gasoline and diesel mitigated the negative effects to some extent.

The company generated revenues of $5.51 billion in the quarter, up 18.1% from the prior-year quarter's revenues of $4.67 billion. The reported quarter's results also surpassed the Zacks Consensus Estimate of $5.48 billion.

Tesoro's competitor in the ‘Oil Refining and Marketing' industry, Valero Energy Corp. (VLO) reported impressive fourth quarter results backed by an improvement in the refining margins environment and better feedstock discounts.

Operating Income

Tesoro's segment operating income (excluding the one-time income of $54 million) shot up significantly to $85 million from an operating loss of $129 million in the year-earlier quarter, reflecting higher product values and reduced feedstock cost.

Operating income of the refining segment upped significantly to $128 million compared with a loss of $213 million in the year-ago quarter, while the retail segment registered a year-over-year decline of 73.2% to $11 million.

Throughput

Total refining throughput averaged around 505 thousand barrels per day (MBbl/d), compared with 530 MBbl/d in the year-ago quarter. Tesoro recorded reduced throughput in Pacific Northwest refineries (down 22.1% year over year) and California (down 4.7% year over year). Throughput increased slightly in Mid-Pacific (up 3.0% year over year) and Mid-Continent (up 13% year over year).

Refining Margins

Gross refining margin leaped 129.6% year over year to $12.33 per barrel. By region, refining margin was up approximately 106.8% in California at $12.24 per barrel, 330.1% in the Pacific Northwest at $14.58 per barrel, 140.7% in the Mid-Pacific at $4.79 per barrel and 69.5% in the Mid-Continent at $14.88 per barrel.

Realized Costs & Prices

Manufacturing costs before DD&A moved up 2.8% from the year-earlier level to $5.50 per barrel. Total refined product sales during the quarter averaged 586 MBbl/d, up 1.4% year over year. Average price realized on product sales escalated 17.9% year over year to $96.98 per barrel. Average cost per barrel was also up 10.3% year over year at $86.85 per barrel.

Capital Expenditure & Balance Sheet

Tesoro's total capital spending during the quarter was $68 million. For full-year 2010, the company incurred a total capital expenditure of $287 million, while $140 million was targeted toward turnaround.

For 2011, management expects to spend around $380 million on capital projects and about $160 million toward turnaround.

As of December 31, 2010, Tesoro had cash and cash equivalents of $648 million and total debt of approximately $1.99 billion, representing a debt-to-capitalization ratio of 38%.

Our Recommendation

Improving market conditions and favorable trends in the refining industry keep us optimistic on Tesoro's prospects in the coming months. We believe that the company's strategic actions intended to brace up its performance and competitiveness in a cost-effective manner will drive profitable growth and boost stock valuation.

In our opinion, Tesoro also stands to benefit from its portfolio of seven refineries, increased sour crude oil processing capacity at Anacortes refinery and exposure to the West Coast-focused operating base.Given these positive aspects, we maintain a long-term Outperform rating on the stock.

 
TESORO CORP (TSO): Free Stock Analysis Report
 
VALERO ENERGY (VLO): Free Stock Analysis Report
 
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