Independent refiner Tesoro Corporation (TSO) reported better-than-expected third-quarter 2014 earnings on strong performance by all its business segments.
The company reported adjusted earnings from continuing operations of $3.06 per share, which comfortably surpassed the Zacks Consensus Estimate of $2.15. The bottom line also showed a massive improvement from the year-ago quarter adjusted earnings per share of 44 cents.
Tesoro Corporation reported quarterly revenues of $11,151 million, which decreased from $11,241 million in the comparable quarter last year. Moreover, it failed to meet the Zacks Consensus Estimate of $11,305 million on marginally lower throughput volumes.
Segmental Analysis
Refining: The segment posted an operating income of $578 million, substantially higher than $128 million earned in the year-earlier quarter. Improvement in refining margins aided the results.
TLLP: During third-quarter 2014, TLLP contributed $61 million in operating profit, compared with $13 million in the year-ago quarter. The improvement can be attributed to higher volumes by the Los Angeles logistics assets and the High Plains System, in addition to increased contribution from the West Coast Logistics Assets.
Retail: The segment earned $138 million, a large rise from $56 million in the third quarter of 2013. The upside was driven by higher sales from ARCO, retail branding expansions and profitable market conditions. Higher fuel sales further aided the result.
Throughput
Total refining throughput averaged 858 thousand barrels per day (MBbl/d), lower than 863 MBbl/d in the prior-year quarter.
Overall throughput volumes in California (consisting of Martinez and Los Angeles refineries) fell 3.4% year over year to 538 MBbl/d. Throughput in Tesoro Corporation’s Pacific Northwest (Alaska and Washington) operations increased 2.8% year over year to 187 MBbl/d. Moreover, throughput volumes in Mid-Continent (North Dakota and Utah) grew 7.3% year over year to 133 MBbl/d.
Refining Margins
Gross refining margin jumped 82.2% year over year to $15.49 per barrel.
Region-wise, refining margin recorded an increase of over 95% to $13.01 per barrel in California, 141.4% to $15.64 per barrel in Pacific Northwest and 28.3% to $25.23 per barrel in Mid-Continent, all on a year-over-year basis.
Realized Costs & Prices
Manufacturing costs before depreciation and amortization increased nearly 14% from the year-earlier level to $5.42 per barrel.
Total refined product sales averaged 972 MBbl/d, marginally higher than 964 Mbbl/d in the third quarter of 2013.
Average price realized on product sales fell about 1.4% year over year to $118.75 per barrel and average cost per barrel was down 5.8% to $106.93 per barrel.
Operating Cost
Tesoro Corporation’s operating costs in the reported quarter came in at $624 million, marking an increase of 15.1% from the year-ago quarter.
Share Repurchases & Dividends
In third-quarter 2014, Tesoro Corporation repurchased stock worth roughly $150 million. The company returned about $189 million to stockholders in the said quarter through share buyback programs and dividend payments.
Tesoro Corporation plans to complete its share buybacks under its $1 billion share buyback program by the end of this year, before commencing the next $1 billion share buyback program approved by the board last quarter.
The company announced its regular quarterly cash dividend of 30 cents per share. The dividend will be paid on Dec 15 to shareholders of record on Nov 28.
Capital Expenditure & Balance Sheet
Tesoro Corporation’s total capital spending in the reported quarter (including TLLP) totaled $194 million (60.8% directed toward refining segment).
As of Sep 30, 2014, the company had $1,530 million of cash on hand and long-term debt of $2,938 million, representing a debt-to-capitalization ratio of 33.3%.
Guidance
Tesoro Corporation lowered its 2014 capital spending guidance to $550 million from the earlier estimate of $625 million (excluding the TLLP investment). The company reiterated TLLP capital spending at $200.
The company continues to project turnaround costs of around $195 million for 2014 and deferred retail branding costs for full-year 2014 at $20 million.
Zacks Rank
Tesoro Corporation currently carries a Zacks Rank #3 (Hold).
Meanwhile, one could consider better-ranked players in the oil refining and marketing sector like Murphy USA Inc. (MUSA), CrossAmerica Partners LP (CAPL) and Sprague Resources LP (SRLP). While Murphy USA sports a Zacks Rank #1 (Strong Buy), CrossAmerica Partners and Sprague Resources hold a Zacks Rank #2 (Buy).
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