Tesoro Moves Up to Outperform

We are upgrading our recommendation on Tesoro Corporation ( TSO - Analyst Report ) to Outperform from Neutral, owing to its improvement in operational efficiency, high-return projects and lucrative acquisitions.

An independent refiner and marketer of refined petroleum products – Tesoro operates in two segments: Refining (accounted for 93% of the company’s total 2011 operating income) and Retail (7%).

Tesoro performed impressively from April to June and posted earnings per share of $2.87, breezing past the Zacks Consensus Estimate of $2.28. Comparing year over year, the result jumped 73.9% from $1.65 per share. Quarterly revenue of $8,105.0 million was up 1.8% year over year and was 17.5% above our projection. The results were influenced by strong operations and favorable market conditions along with benefits from acquisitions.

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

Tesoro stands to benefit from its strategic initiatives that include improving business processes, reducing operating costs, enhancing the integration of the refining portfolio and investing in organic growth.

The company is involved in 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.

Following a hiatus of more than two years, Tesoro has recently re-instated its dividend payout. The company also announced a $500 million share repurchase program. We believe that the resumption of dividend and the 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.

Additionally, a major advantage for the company is the scale and diversification benefits afforded by its portfolio of seven refineries.

Overall, we believe Tesoro is well positioned going forward and view it as an attractive investment.