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Independent refiner Tesoro Corporation (TSO - Analyst Report) reported weaker-than-expected third quarter 2013 earnings due to higher operating expenses and sharp drop in refining margins across all the regions.

Earnings per share (excluding special items) came in at 44 cents, down 77.4% from the year-ago earnings of $1.95 and below the Zacks Consensus Estimate of 49 cents.

On the other hand, Tesoro reported revenues of $11,241.0 million, up 41.5% from $7,944.0 million in the comparable quarter last year and above our projection of $9,453.0 million. The outperformance could be attributable to ballooned throughput and improved performance by the retail segment.

Segmental Analysis

Refining: The segment posted an operating income of $141.0 million, reflecting a steep decline from the $583.0 million earned in the year-earlier quarter due to lower margins and higher manufacturing costs.

Retail: The segment earned $56.0 million, up from $18.0 million in the third quarter of 2012 amid higher margins.

Throughput

Total refining throughput averaged 863 thousand barrels per day (MBbl/d) compared with 548 MBbl/d in the prior-year quarter.

Overall throughput volumes in California (consisting of Martinez and Los Angeles refineries) shot up 114.2% year over year to 557 MBbl/d. Moreover, throughput in Tesoro’s Pacific Northwest (Alaska and Washington) operation also increased 12.4% year over year to 182 MBbl/d.  

However, throughput volumes in Mid-Continent (North Dakota & Utah) fell marginally by 1.6% year over year to 124 MBbl/d.

Refining Margins

Gross refining margin saw a decrease of 53.1% year over year to $9.22 per barrel.

In terms of different regions, refining margin decreased in California (40.5% year over year to $7.21 per barrel), in Mid-Continent (43.9% to $21.39 per barrel) and Pacific Northwest (59.6% to $7.02 per barrel).  

Realized Costs & Prices

Manufacturing costs before depreciation and amortization increased 1.9% from the year-earlier level to $4.76 per barrel.

Total refined product sales averaged 964 MBbl/d, up 44.5% year over year.

Average price realized on product sales decreased 5.7% year over year to $117.53 per barrel and average cost per barrel increased 1.5% to $109.97 per barrel.

Capital Expenditure & Balance Sheet

Tesoro’s total capital spending during the third quarter was $123.0 million (90.2% directed toward refining segment). The company lowered its projected capital spending for 2013 by $105.0 million to $585.0 million. However, Tesoro reiterated its turnaround spending projection of $400 million.

As of Sep 30, 2013, Tesoro had $1,492.0 million cash on hand and total debt of $3,375.0 million, representing a debt-to-capitalization ratio (excluding capital leases associated with discontinued operations) of 39%.

Dividend & Share Repurchases

Tesoro announced its quarterly dividend of 25 cents per share ($1.0 per share annualized) to be paid on Dec 13, 2013 to shareholders of record on Nov 29.

Tesoro increased its share repurchase program to $1 billion from $500 million. Moreover, Tesoro returned roughly $135.0 million to shareholders by purchasing more than 2.0 million of its shares and through its dividend payout during the reported quarter.

Zacks Rating

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

Meanwhile, one can consider other firms in the energy sector like SM Energy Company (SM - Analyst Report), Memorial Production Partners LP (MEMP - Snapshot Report) and Northern Oil and Gas, Inc. (NOG - Snapshot Report) that offer value. All these firms sport a Zacks Rank #1 (Strong Buy).

 

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