We are maintaining a long-term Outperform rating on Tesoro Corporation (TSO), reflecting the company’s consistent growth momentum, positive trends in the refining industry coupled with improvement in the overseas economic activities.
Tesoro reported robust second-quarter 2011 results, driven by higher throughput, improved margin environment and solid operational performance. Earnings per share (excluding special items) came in at $1.65, comfortably surpassing the Zacks Consensus estimate of $1.34 per share and way above the year-ago adjusted profit of 30 cents per share.
The company’s revenue of $7,963.0 million was 13.5% above our projection and was also up 54.8% year over year.
We 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. This increased supply capacity will enable the company to capture growing drilling activities and higher production in the Bakken Shale and strengthen its presence in the energy sector, through the enhancement of the refining and marketing business.
Additionally, management’s focus on improving business processes, as well as reducing operating costs, enhancing the integration of the refining portfolio and investing in organic growth are expected to boost the company’s performance in the coming months.
The company has begun to benefit from these initiatives, which include economies of scale for crude purchases in California, commissioning of the delayed coker at Golden Eagle, improved electricity reliability and control modernization at Hawaii, and increased sour crude oil processing capacity at Anacortes etc.
Increased economic activities in the overseas market (mainly in China and India) and prospects for higher fuel demand in the U.S. are likely to push industry margins in 2011 higher than the year-ago levels. Against this backdrop, we expect income from Tesoro’s refining operations to improve over the next few quarters.
All these aspects lend a competitive edge to Tesoro over its peers such as Valero Energy Corp. (VLO) and Sunoco Inc. (SUN) and positions its strongly, going forward.
SUNOCO INC (SUN): Free Stock Analysis Report
TESORO CORP (TSO): Free Stock Analysis Report
VALERO ENERGY (VLO): Free Stock Analysis Report
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