Independent refiner Tesoro Corporation (TSO) came out with stellar third-quarter 2011 results, driven by higher throughput, improved margin environment and solid operational performance.
Earnings per share (excluding special items) came in at $2.39, comfortably surpassing the Zacks Consensus Estimate of $1.83 and way above the year-ago adjusted profit of 51 cents.
The company reported revenue of $8,101.0 million for the three-month period, up 52.3% from the prior-year figure of $5,320.0 million. The result was 18.2% above our projection.
Segmental Analysis
Refining: Tesoro’s Refining segment posted an operating income of $600 million versus $146 million in the year-earlier quarter. This marked improvement can be attributed to higher refinery throughput rates, significant crude sourcing advantage, and better margins.
Retail: The Retail unit earned $22 million during the three-month period, down from $32 million in the third quarter of 2010.
Throughput
Total refining throughput averaged 609 thousand barrels per day (MBbl/d), compared to 472 MBbl/d in the year-ago quarter, aided by higher volumes in all regions.
California(Golden Eagle and Los Angeles) registered a year-over-year hike of 2.5% and the Pacific Northwest (Alaska and Washington) output shot up 164.1%. Throughput in the company’s Mid-Pacific (Hawaii) region jumped 39.6%, while that of the Mid-Continent (North Dakota & Utah) increased 4.4%.
Refining Margins
Gross refining margin rose 38.8% year over year to $18.43 per barrel. In terms of different regions, refining margin was up approximately 8.4% in California at $14.90 per barrel, 28.3% in the Pacific Northwest at $14.99 per barrel, 171.6% in the Mid-Pacific at $13.58 per barrel, and 95.3% in the Mid-Continent at $33.51 per barrel.
Realized Costs & Prices
Manufacturing costs before depreciation and amortization dropped 25.6% from the year-earlier level to $4.57 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 687 MBbl/d, up 16.6% year over year. The average price realized on product sales increased 38.5% year over year to $122.78 per barrel. Average cost per barrel was also up 38.2% from the third quarter of 2010 at $109.13 per barrel.
Capital Expenditure & Balance Sheet
Tesoro’s total capital spending during the quarter under review was $86 million, of which 80% was targeted toward the refining segment. Turnaround spending for the quarter was $17 million.
The company informed that it expects capital spending for 2011 to be around $320 million, together with turnaround spending of around $110 million.
As of September 30, 2011, Tesoro had cash on hand of $1,135 million and total debt of $1,604.0 million, representing a debt-to-capitalization ratio of 28%.
Acquisitions
Recently, Tesoro entered into an agreement with Supervalu Inc. (SVU) to acquire 50 Albertson's Fuel Express stations for $34 million, with a plan to burn up an incremental $5 million in branding capital
In another development, Tesoro agreed to lease 240 southern California retail stations from Thrifty Oil Co. for an initial term of 10 years. Tesoro aims to invest $28 million in branding capital.
Our Recommendation
San Antonio, Texas-based Tesoro enjoys the scale and diversification benefits afforded by its portfolio of seven refineries. We also appreciate the company’s solid long-term competitive position in the supply-constrained California market.
Additionally, we believe Tesoro’s strategic actions –– to improve its performance and competitiveness in a cost-effective manner –– will drive its profit and boost stock valuation. Hence, we maintain a long-term Outperform rating on the stock.
Tesoro currently retains a Zacks #2 Rank (short-term Buy rating).
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