Tesoro Puts Hawaii Unit for Sale

In an attempt to redesign its operational base,Tesoro Corporation (TSO - Analyst Report) is set to offload its oil refinery in Hawaii. The company intends to complete the divestiture in the second half of 2012.

Tesoro stated that the to-be divested assets include the Kapolei refinery – having capacity of 94 thousand barrel per day – along with 32 retail gasoline stations and associated logistical assets.

Favorably located, the Kapolei refinery boasts a strong logistical infrastructure that lends support to product movements to and from the U.S. West Coast or Pacific Rim markets. The complete set-up comprise advanced hydrocracking refinery, network of retail stations along with pipelines connecting business hubs such as Honolulu International Airport, the military fuel depot and Barbers Point inter island barge harbor.

Despite these positive factors, Tesoro believes that the refinery does not fit with the company’s long-term strategic planning on the Mid-Continent and West Coast. Management aims to concentrate more on its core refining operations in the continental U.S.

This asset sale news is on the heels of the company’s last week’s announcement of an expected fourth-quarter loss due to low margin environment in California along with the weakening crude oil spread. Tesoro projects loss in the range of 55 cents to 80 cents per diluted share in the quarter.

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%).

We believe that Tesoro’s strategic actions – to improve its performance and competitiveness in a cost-effective manner – will drive its growth momentum and boost the stock valuation. In the near term, the company also stands to benefit from management’s focus on balance sheet improvement.

However, with domestic refining fundamentals remaining weak, we do not see any significant price upside for Tesoro in the coming months. Given the macro environment headwinds, we expect Tesoro shares to perform in line with the broader market and maintain our long-term Neutral recommendation.

Tesoro, which competes in the ‘Oil Refining and Marketing’ industry with the likes of Valero Energy Corp. (VLO - Analyst Report) and Western Refining Inc. (WNR - Analyst Report), currently retains a Zacks #3 Rank (short-term Hold rating).

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