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Analyst Blog

Shares of Tesoro Corp. (TSO - Analyst Report) hit a 52-week high of $63.43 on Aug 8. In fact, the San Antonio, TX-based independent refiner has seen its stock price climb some 7% since reporting second quarter results on Jul 30. Though the downstream operator missed earnings estimates, it increased its quarterly dividend and announced a $1 billion stock repurchase program.

Why the Bullishness?

Tesoro is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 850,000 Bbl/d. A major advantage for the company is the scale and diversification benefits afforded by its portfolio of six refineries. Additionally, Tesoro holds certain midstream pipeline and logistics assets, operated by its 35%-owned partnership Tesoro Logistics L.P. (TLLP - Snapshot Report).

We also like Tesoro’s solid long-term competitive position on the supply-constrained California market. With the conclusion of the company’s proposed acquisition of BP Plc's (BP - Analyst Report) Southern California refining and marketing business, Tesoro now controls 60% of the refining capacity in that state, apart from improving production flexibility.

Following the re-instatement of its dividend payout after hiatus of more than two years, Tesoro has been increasing the same in regular intervals, the latest being a 20% hike announced during the second quarter earnings release. Concurrently, the company also announced that a $1 billion share repurchase program has been approved by its board. This new stock buyback plan will be effective after completion of the company’s existing $1 billion share repurchase program, which is expected by the year end.

We believe that the regular payout boosts and the expanded buyback authorization not only highlights Tesoro’s commitment to create value for shareholders but also underlines the company’s confidence in its future earnings momentum.

Finally, management is paying greater attention to 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. These projects will not only boost the company’s competitive position among its peer group, but will also provide significant earnings and cash flow growth visibility.

Zacks Rank & Stock Pick

With Tesoro shares trading at 52-week high, any upside from here may be limited, as suggested by the company's Zacks Rank #3 (Hold).

A better-ranked stock in the ‘Oil Refining & Marketing’ sector would be EnLink Midstream LLC (ENLC - Snapshot Report). It carries a Zacks Rank #1 (Strong Buy).

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