Tesoro Misses, Outlook Gloomy

Tesoro Corporation (TSO - Analyst Report) reported a weaker-than-expected second-quarter 2009 loss, reflecting lower gross margins and decreased throughput on the back of weak fuel demand and high inventories. This was partially offset by lower operating costs. Loss per share came in at $0.33, below the Zacks Consensus Estimate of $0.30.

In the year-ago period, the Texas-based marketer of petroleum products earned $0.03 per share. Revenue was down 53.0% year-over-year to $4.2 billion.

Refining Segment Results

Tesoro’s refining segment experienced a significant decline in operating income (operating income of just $7 million vs. $85 million in the year-earlier quarter) due to struggling profit margins for the production of distillate fuels (like heating oil and diesel), as well as narrowing of the sweet/sour crude spread. The company’s throughputs also suffered from the maintenance at its Alaska and Golden Eagle, California refineries.

Throughput

Total refining throughput averaged 565 thousand barrels per day (MBbl/d), compared to 610 MBbl/d in the year-ago quarter. Overall throughput volumes in the California region (consisting of the Golden Eagle and Los Angeles refineries) increased marginally (by 0.4%) year-over-year to 251 MBbl/d. Throughput in the company’s Pacific Northwest refineries (Alaska and Washington) decreased 20.6% year-over-year to 139 MBbl/d, while for the Mid-Pacific (Hawaii) refineries, it was down approximately 7.0% to 66 MBbl/d.

Refining Margins

Gross refining margin decreased 15.6% year-over-year to $8.52 per barrel. In terms of different regions, refining margin was down more than 42% in California to $8.09 per barrel, and roughly 18.5% in the Mid-Continent to $11.29 per barrel. Gross margin in the Mid-Pacific and Pacific Northwest regions increased significantly to $2.52 and $9.70 per barrel, respectively.

Realized Costs & Prices

Manufacturing costs before DD&A decreased 13.5% from the year-earlier level to $4.63 per barrel, primarily due to lower energy costs. Total refined product sales during the quarter averaged 607 MBbl/d, down 10.9% year-over-year. Average price realized on product sales decreased 48.7% year-over-year to $69.63 per barrel. Average cost per barrel was also down 50.6% year-over-year to $61.80 per barrel.

Capital Expenditure & Balance Sheet

Tesoro’s total capital spending (including turnaround expenditure) during the second quarter of 2009 was $173 million. At the end of the first quarter, Tesoro had cash on hand of $279 million and long-term debt of approximately $1.8 billion, representing a debt-to-capitalization ratio of 36%.

Guidance

With demand for almost all fuel products remaining in a downtrend, Tesoro expects its six refineries to operate at below capacity (83.3% of their combined capacity) during the third quarter. Total refining throughput is expected to average 550-590 MBbl/d. The company further informed that it expects capital spending for 2010 to be in the $600 million range and is not planning to acquire new refineries in the short-term.

Following the poor financial results, we maintain our Sell recommendation on the stock.

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