Independent refiner Tesoro Corporation (TSO) came out with impressive 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 and way above the year-ago adjusted profit of 30 cents.
The San Antonio, Texas-based firm reported revenue of $7,963.0 million for the three-month period. This was 13.5% above our projection and was also up 54.8% year-over-year.
Segmental Analysis
Refining: Tesoro’s Refining segment posted an operating income of $399 million versus $150 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 $38 million during the three-month period, up from $30 million in the second quarter of 2010, buoyed by higher fuel sales volumes.
Throughput
Total refining throughput averaged 578 thousand barrels per day (MBbl/d), compared to 474 MBbl/d in the year-ago quarter.
Overall throughput volumes in the Pacific Northwest (Alaska and Washington) and Mid-Continent refineries (North Dakota & Utah) increased 100.0% and 36.9% year-over-year to 168 MBbl/d and 115 MBbl/d, respectively.
However, throughput in the company’s California region (consisting of the Golden Eagle and Los Angeles refineries) fell 5.0% from the second quarter of 2010 to 227 MBbl/d, while that in the Mid-Pacific (Hawaii) remained flat at 68 MBbl/d.
Refining Margins
Gross refining margin rose 28.9% year-over-year to $16.61 per barrel. In terms of different regions, refining margin was up approximately 13.1% in California to $15.25 per barrel, 12.6% in the Pacific Northwest to $14.39 per barrel, 82.4% in the Mid-Pacific to $9.76 per barrel, and 50.0% in the Mid-Continent to $26.07 per barrel.
Realized Costs & Prices
Manufacturing costs before depreciation and amortization fell 10.6% from the year-earlier level to $5.13 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 657 MBbl/d, up 16.5% year over year. Average price realized on product sales increased 41.5% year-over-year to $128.67 per barrel. Average cost per barrel was also up 42.7% from the second quarter of 2010 to $117.01 per barrel.
Capital Expenditure & Balance Sheet
Tesoro’s total capital spending during the quarter under review was $63 million, while $46 million was exhausted on the turnaround. The company informed that it expects capital spending for 2011 to be around $380 million, together with turnaround spending of around $110 million.
As of June 30, 2011, Tesoro had cash on hand of $607 million and total debt of $1,723.0 million, representing a debt-to-capitalization ratio of 30.9%.
Our Recommendation
Tesoro, which competes in the ‘Oil Refining and Marketing’ industry with firms like Valero Energy Corp. (VLO) and Sunoco Inc. (SUN), has a Zacks #3 Rank, which translates into a short-term Hold rating.
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