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Independent refiner Tesoro Corporation (TSO - Analyst Report) reported weak fourth-quarter 2013 earnings due to significantly higher operating expenses and sharp drop in refining margins across all operating regions.

Earnings per share (excluding special items) came in at 4 cents, down 97.1% from the year-ago adjusted earnings of $1.38 and substantially below the Zacks Consensus Estimate of 30 cents.

However, Tesoro reported revenues of $10,116.0 million, up 34.4% from $7,525.0 million in the comparable quarter last year and above the Zacks Consensus Estimate of $9,918.0 million. The outperformance can be attributed to robust throughput volumes in the refining segment.

For the year ended Dec 31, 2013, earnings per share of Tesoro came in at $2.77, lagging the Zacks Consensus Estimate of $3.05 per share. The figure also fell sharply from the year-ago profit of $6.38 per share.

Revenues for the year stood at $37,601 million as compared with $29,809.0 million in fourth-quarter 2012.

Segmental Analysis

Refining: The segment posted an operating income of $106.0 million, reflecting a steep decline from $344.0 million earned in the year-earlier quarter due to lower margins and higher manufacturing costs.

Retail: The segment earned $24.0 million, down from $41.0 million in the fourth quarter of 2012 owing to significant hike in segment operating expenses.

Throughput

Total refining throughput averaged 786 thousand barrels per day (MBbl/d) compared with 532 MBbl/d in the prior-year quarter.

Overall throughput volumes in California (consisting of Martinez and Los Angeles refineries) shot up 98.4% year over year to 494 MBbl/d. Throughput in Tesoro’s Pacific Northwest (Alaska and Washington) operation also increased 4.4% year over year to 167 MBbl/d.  

Moreover, throughput volumes in Mid-Continent (North Dakota & Utah) improved marginally by 1.6% year over year to 125 MBbl/d.  

Refining Margins

Gross refining margin witnessed a decrease of 37.5% year over year to $9.45 per barrel.  

In terms of different regions, refining margin decreased in California (42.7% year over year to $6.08 per barrel), in Mid-Continent (22.8% to $20.63 per barrel) and Pacific Northwest (16.9% to $10.94 per barrel).   

Realized Costs & Prices

Manufacturing costs before depreciation and amortization increased 10.5% from the year-earlier level to $5.39 per barrel.

Total refined product sales averaged 905 MBbl/d, up 43.4% year over year.

Average price realized on product sales decreased 5.1% year over year to $112.95 per barrel and average cost per barrel decreased 2.8% to $105.22 per barrel.

Increased Operating Cost

Tesoro’s operating cost for the quarter came in at $560.0 million, a significant increase of 50.5% from the year-ago quarter.

Share Repurchases

In the fourth-quarter 2013, Tesoro repurchased roughly $100.0 million worth shares.

The company has returned roughly $135.0 million to stockholders in the fourth quarter of 2013, through share buyback program and dividend payment.

Capital Expenditure & Balance Sheet

Tesoro’s total capital spending during the fourth quarter was $146.0 million (65.8% directed toward refining segment). Moreover, the company spent $360.0 million for turnaround activities.

As of Dec 31, 2013, Tesoro had $1,238.0 million cash on hand and total debt of $2,829.0 million, representing a debt-to-capitalization ratio (excluding capital leases associated with discontinued operations) of 34.0%.

Guidance

The company is planning to invest roughly $670.0 million in 2014. Tesoro’s turnaround cost during 2014 is expected to be $205.0 million.

Zacks Rating

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 one to three months.  

Meanwhile, one can consider better-ranked players in the oil refining and marketing sector like Phillips 66 (PSX - Analyst Report), Valero Energy Corp. (VLO - Analyst Report) and World Fuel Services Corp. (INT - Snapshot Report). All the stocks sport a Zacks Rank #2 (Buy).

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