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Tesoro Outshines Zacks EPS, Revenue

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Independent refiner and marketer of refined petroleum products Tesoro Corp. reported impressive third quarter 2010 results. Net earnings per share, excluding certain expenses, came in at 51 cents, comfortably topping the Zacks Consensus Estimate of 43 cents and the year-ago quarter result of 24 cents.

After including the after-tax expense related to the Anacortes refinery accident, earnings per share for the third quarter 2010 came in at 39 cents.

The company generated revenues of $5.32 billion in the quarter, up 12.2% from the prior year quarter’s revenues of $4.74 billion. The reported quarter results surpassed the Zacks Consensus Estimate of $4.78 billion.

The quarter performance was driven by strong contributions from the refining business unit along with robust distillate exports, a reformed U.S. manufacturing sector and increased port activity nationwide, partially offset by weak gasoline margins.

Operating Income

Tesoro’s operating income (excluding the one-time cost of $23 million) shot up significantly to $201 million from $137 million in the year-earlier quarter, reflecting improved distillate margins, reduced feedstock cost and the company's well-executed initiatives. However, lower gasoline margins and lesser throughput somewhat dampened the positives.

Operating income of the refining segment upped heavily by 73.8% year over year to $146 million, while the retail segment registered a year-over-year decline of 39.6% to $32 million.


Total refining throughput averaged around 472 thousand barrels per day (MBbl/d), compared with 564 MBbl/d in the year-ago quarter. Tesoro experienced reduced throughput in Pacific Northwest refineries (down 58.7% year over year) and Mid-Pacific (down 19.7% year over year). Throughput increased slightly in California (up 2.6% year over year) and Mid-Continent (up 5.6% year over year)

Refining Margins

Gross refining margin leaped 38.5% year over year to $13.28 per barrel. In terms of different regions, refining margin was up approximately 19.1% in California to $13.74 per barrel, 28.6% in the Pacific Northwest to $11.68 per barrel, 376.2% in the Mid-Pacific to $5.00 per barrel and 49.2% in the Mid-Continent to $17.16 per barrel.

Realized Costs & Prices

Manufacturing costs before DD&A escalated 28.2% from the year-earlier level to $6.14 per barrel. Total refined product sales during the quarter averaged 589 MBbl/d, down 3.6% year over year. Average price realized on product sales moved up 6.1% year over year to $88.81 per barrel. Average cost per barrel was also up 3.2% from the third quarter of 2009 to $78.95 per barrel.

Capital Expenditure & Balance Sheet

Tesoro’s total capital spending (including turnarounds) during the quarter was $110 million. Management expects capital spending for 2010 to be around $475 million to $500 million.

As of September 30, 2010, Tesoro had cash and cash equivalents of $339 million and total debt of approximately $1.8 billion, representing a debt-to-capitalization ratio of 37%.

Anacortes Refinery

Tesoro has resumed its operations at the Anacortes refinery on October 17, with improved working facilities. The refinery was shut down after a deadly explosion in April, 2010.

Our Recommendation

We remain optimistic about Tesoro’s refining segment based on the company’s exposure to a portfolio of seven refineries. The company’s competitive position in the industry will ensure its growth momentum to stay ahead of its peers.

However, in the face of an unfavorable macro backdrop and the imbalance between supply and demand of refining products, we maintain our long-term neutral recommendation on the stock.

Tesoro currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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