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Can Tesoro (TSO) Spring a Surprise This Earnings Season?

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Independent oil refiner and marketer Tesoro Corporation is set to release first-quarter 2017 results after the closing bell on May 8.

In the preceding quarter, the San Antonio, TX-based downstream operator delivered a positive earnings surprise of 88.69%. Significant contribution from the logistics segment supported the company’s performance.

Coming to earnings surprise history, the company has an impressive record. The company beat estimates in each of the last four quarters with an average positive surprise of 50.02%.

Let’s see how things are shaping up for this announcement.

Factors at Play

Tesoro is one the largest independent oil refiners in the U.S. The scale and diversification benefits offered by the seven refineries are a major advantage for the company. Further, the impending merger of Tesoro with Western Refining Inc , expected to close in the first half of this year, has raised optimism about the stock’s prospects.

Apart from bolstering its network of assets, the purchase will help Tesoro enhance its geographic footprint in the prolific Permian Basin, driving its future earnings growth.  Moreover, Tesoro’s consolidated refining index values have been improving owing to higher index values in California and the Midcontinent. This is likely to contribute positively in its earnings.

Tesoro derives part of its operating profits from the logistics segment. However, the weaker pricing environment, especially in March, when oil traded below $50 per barrel, could hamper earnings and volume at the company’s logistics segment.

Nevertheless, although crude ended the first quarter of this year 5.8% lower, the pricing environment of commodity prices was much healthier than the year-ago quarter, courtesy of the historical OPEC agreement. Improvement in oil prices is likely to be unfavorable for Valero’s refining and marketing segment as the input cost for refiners increase with the rise in oil prices. This has also been reflected in the price performance of the company which has declined 8% in the quarter.

Tesoro Corporation Price and Consensus

Earnings Whispers

Our proven model does not conclusively show that Tesoro will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to surpass estimates.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, for Tesoro is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at 36 cents. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: Tesoro under Oil and Gas Refining & Marketing currently carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s Earnings ESP of 0.00% makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Tesoro, here are some firms for investors to consider in the broader energy space that, according to our model has the right combination of elements to post an earnings beat this quarter.

Global Partners L.P. (GLP - Free Report) has an Earnings ESP of +233.33% and a Zacks Rank #1. The partnership is anticipated to release first quarter earnings on May 9. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earthstone Energy, Inc (ESTE - Free Report) is expected to release first-quarter earnings results on May 9. The company has an Earnings ESP of +133.33% and a Zacks Rank #3.

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