Tesoro Lowered to Sell Rating

Our downgrade of Tesoro Corp. (TSO - Analyst Report) shares reflects our weak refining margin outlook. A growing supply overhang in the face of recession-induced fall in global oil product demand has led to a squeeze in refiners profits. Narrower crude quality spreads have also started to weigh on refining margins.

Tesoro's lack of geographic diversification given its West Coast-centric operating footprint and heavy exposure to the weak California market could also become a major liability. Given these headwinds, we expect the independent refiners to underperform the broader equity markets in general and the oil and gas group in particular.

Overall, we see a fairly unfavorable macro backdrop for independent refiners in general and Tesoro in particular. We believe this will cause an underperformance in Tesoro shares relative to the market as well as the sector in the coming quarters. Our new $13 price objective reflects 2009 P/CF multiple of 4.0, inline with the stock s historical trading range.