Tesoro to Push Up Refinery Capacity

Tesoro Corporation (TSO - Analyst Report) announced plans to expand crude oil throughput capacity by about 7% at the Salt Lake City, Utah refinery. In this regard, the company will burn up approximately $180 million.

With this move, Tesoro will be able to boost the throughput of transportation-advantaged black wax and yellow wax crude oil to 21 million barrels per day (mbpd), reflecting an increase of over 100%. The project will also be involved in the conversion of unit upgrades that will lead to a nearly 3% growth in clean product yield at the refinery.

On the basis of initial estimates, the venture, expected to be completed in two stages in 2013 and 2014, has a payback period of less than two years.

Tesoro also inked a seven-year time-frame crude oil supply agreement with Newfield Exploration Company (NFX - Analyst Report). Per the deal, the former will supply 18 mbpd of black wax and yellow wax crude oil, commencing from 2013. However, the financial terms were not disclosed.

This capital investment program highlights Tesoro’s efforts on capitalizing high-return short payback projects that will enable the company to reap higher and better profits. The collaboration with Newfield will render Tesoro the opportunity to canalize the growing supply of domestic crude oil as well as enjoy strong economic benefits.

San Antonio, Texas-based Tesoro is an independent refiner and marketer of refined petroleum products in the western U.S. The company operates in two segments: Refining (accounted for 72% of the company’s total 2010 operating income) and Retail (28%).

In recent times, Tesoro has pumped up its crude oil supply via rail from the Bakken Shale play in North Dakota to its refinery in Anacortes, Washington. This increased supply capacity will enable the company to drive further drilling activities and production in the Bakken Shale and strengthen its strong foothold in the energy sector, through the enhancement of the refining and marketing business.

During the last few quarters, Tesoro has consistently achieved profitable growth that has boosted its stock valuation. In the near term, the company stands to benefit from a healthy balance sheet profile and a portfolio of seven refineries.

However, Tesoro remains exposed to risks from the dampened U.S. economic growth and weak product demand. Its lack of geographic diversification and excessive dependence on the West Coast market will further limit positive earnings surprises. Hence, we maintain a long-term Neutral rating on the stock.

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