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Refining Unit Brightens Tesoro's 2Q

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Independent refiner Tesoro Corporation declared stellar second-quarter 2012 results, based on strong operations and favorable market conditions along with benefits from acquisitions.

The company reported 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.

The company reported revenue of $8,105.0 million for the three-month period, up 1.8% from the prior-year figure of $7,963.0 million. The result was 17.5% above our projection.

Segmental Analysis

Refining: Tesoro’s Refining segment posted quarterly operating income of $645 million, 61.7% higher than $399 million in the year-earlier quarter.

Retail: The Retail unit generated operating income of $74 million during the three-month period, up from $38 million in the second quarter of 2011, aided by the addition of new units.


Total refining throughput averaged 579 thousand barrels per day (MBbl/d) in the reported quarter, almost in line with the year-ago quarter result.

California (Golden Eagle and Los Angeles) registered a year-over-year improvement of 18.1%. The Pacific Northwest (Alaska and Washington) output dropped 14.9%. Throughput in the company’s Mid-Pacific (Hawaii) region decreased 17.7%, while that of the Mid-Continent (North Dakota & Utah) dipped 2.6%.

Refining Margins

Gross refining margin increased 22.3% year over year to $20.32 per barrel. In terms of different regions, refining margin was down approximately 13.4% in California at $13.20 per barrel.

Negating the decline, refining margin in the Pacific Northwest improved 50.4% at $21.64 per barrel, in the Mid-Pacific jumped 47.8% at $14.43 per barrel and in the Mid-Continent region grew 47.8% at $38.54 per barrel.

Realized Costs & Prices

Manufacturing costs before depreciation and amortization decreased 5.9 from the year-earlier level to $4.83 per barrel, in keeping with Tesoro’s stated objectives of reducing operating costs and increasing throughput rates.

Total refined product sales during the quarter averaged 684 Bbl/d, up 4.1% year over year. The average price realized on product sales decreased 2.7% year over year to $125.22 per barrel. Average cost per barrel was also moved down 5.2% from the second quarter of 2011 at $110.96 per barrel.

Capital Expenditure & Balance Sheet

During the quarter, Tesoro’s total capital spending was $148 million (excluding retail acquisition), of which 82% was targeted toward the refining segment. Turnaround spending for the quarter was $64 million.

As of June 30, 2012, Tesoro had $1,322.0 million cash on hand and total debt of $1,350.0 million, representing a debt-to-capitalization ratio of 23.4%.


Tesoro expects capital expenditure for 2012 to be around $670 million, together with a turnaround spending of around $260 million (down from the previous forecast of $300 million).


During the quarter, Tesoro completed the acquisition of 165 retail stations in Southern California from Thrifty Oil Company.


Tesoro also announced plans to transfer its Long Beach marine terminal and Los Angeles short-haul pipelines to Tesoro Logistics L.P. . The deal – financial terms of which are not yet decided – is expected to be closed in the third quarter of 2012.

The company also confirmed its decision to drop down Anacortes, Washington unit train unloading facility to Tesoro Logistics. This transaction is slated to be completed in the fourth quarter of 2012.

Our Recommendation

San Antonio, Texas-based Tesoro currently retains a Zacks #2 Rank (short-term Buy rating).

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