Tesoro Results Miss Estimates

Tesoro Corp. (TSO - Analyst Report) reported weak second-quarter results, reflecting reduced product margins on the back of record feedstock costs and increased operating expenses. The company’s realized margin during the quarter was down 52% from the year-earlier level as record crude oil prices and anemic product demand squeezed margins.

We believe that high feedstock and operating costs will continue to weigh on near-term margins, which accounts for our negative earnings revision. However, our long-term view of the business remains favorable, as margins appear to have bottomed and valuations have become particularly compelling.

On July 30, Tesoro reported earnings of $0.03 per diluted share, compared to $3.19 per diluted share in the year-earlier quarter. While the second-quarter results were an improvement over the previous quarter and the recent crude oil pullback has improved the environment some more, the overall backdrop for the refining group remains very unfavorable.

Crude prices in the second quarter were up by nearly $60 per barrel from the year-earlier level, which in turn affected product margins, particularly for gasoline blends. The benchmark West Coast margin in the second quarter was down nearly 40% year-over-year. Escalating operating expenses further pressure the bottom-line results. We have lowered our earnings estimates to reflect this unfavorable macro backdrop. Our new estimates are a loss of $0.24 per share for 2008 and earnings of $2.30 per share for 2009, down from $1.90 and $3.58 before, respectively.

Tesoro expects to realize approximately $750 million to $1 billion in operating cash flow savings this year through reduced operating and administrative costs, lower capital expenditures, and reduced working capital driven mainly by inventory reduction. The company reiterates its capital spending program at $870 million for 2008.

Read the full analyst report on TSO

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