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Tesoro Refining & Marketing Co., a subsidiary of petroleum products refiner and marketer Tesoro Corporation (TSO - Analyst Report), was recently awarded a Department of Defense contract worth $10.6 million. Per the contract, Tesoro will supply fuel to the government.

The one-year contract is being managed by the Defense Logistics Agency Energy. We view this contract as a positive for Tesoro as this will bring cash flows for the company.

San Antonio, Texas-based Tesoro Corporation is an independent refiner and marketer of refined petroleum products in western U.S. The company operates in two segments: Refining and Retail. The Refining segment manufactures and sells gasoline and gasoline-blend stocks, jet fuel, diesel fuel, and other refined products to customers, primarily in the mid-continental and western U.S. This segment also markets liquefied petroleum gas, petroleum coke, and asphalt.

We maintain our long-term Outperform recommendation on the stock, supported by a Zacks #2 Rank (short-term Buy rating).

Tesoro is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 675,000 Bbl/d. A major advantage for the company is the scale and diversification benefits afforded by its portfolio of seven refineries.

During the last few quarters, the jump in crack spreads – the conventional measure of refining profitability – has favorably impacted Tesoro’s earnings. With crude crack spreads set to widen in the near future, we see a further boost in the company’s profitability and valuation.

We believe that Tesoro’s capital investment program highlights its efforts to capitalize on high-return short payback projects that are expected to have long-term positive effects for the firm.

Our positive stance also revolves around Tesoro’s proposed acquisition of BP Plc’s (BP - Analyst Report) Southern California refinery, which, apart from boosting refinery capacity, will also improve the company’s operational efficiency.


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