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Independent refiner Tesoro Corporation (TSO - Analyst Report) has entered into a deal with an affiliate of Par Petroleum Corporation, an energy firm with interests in wide ranging assets.  

Per the agreement, Tesoro will sell its 100% ownership of Tesoro Hawaii LLC to the Houston-based Par Petroleum’s arm. Tesoro Hawaii owns Kapolei refinery, which has a refining capacity of 94,000 barrel per day and is also the owner of retail stations and related logistic properties.

The deal involves a cash transaction of $75 million and an estimated $225 million to $275 million market value of net working capital. The sale price also comprises an earn-out agreement of up to $40 million, which will be paid over a span of three years.

The deal is expected to be completed by the third quarter of 2013, but will be subject to the approvals from the regulators.

Tesoro management reveals that the primary reason behind the sale of the asset is that the Hawaii operations were not in line with the company’s business focus.

San Antonio, Texas-based Tesoro operates in two segments: Refining and Retail. Tesoro is paying greater attention for improving business processes, reducing operating costs, enhancing the integration of the refining portfolio and investing in organic growth. Tesoro is involved with a number of high-return projects that are expected to be cost effective.  

However, in an effort to reduce pollution, the Environmental Protection Agency (EPA) has recently outlined a proposal that would require refiners to reduce sulfur content in gasoline by 67% starting 2017. To comply with the new norm, Tesoro will have to increase its capital expenditure, which will adversely impact earnings and cash flows.

Tesoro currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next 1 to 3 months.   

Meanwhile, one can look at Ferrellgas Partners LP (FGP - Analyst Report), InterOil Corporation (IOC - Snapshot Report) and EQT Midstream Partners LP (EQM - Snapshot Report) as good buying options. These energy stocks – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with the potential to rise significantly from the current levels.

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