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Tesoro Logistics Prices Unit Offer

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Fuel-gatherer/transporter Tesoro Logistics L.P. has priced a public offering of 3,700,000 common units at $41.80 a piece, with a 30-day over-allotment option for an additional 555,000 units. The master limited partnership (MLP) plans to use the net proceeds from this offering for general partnership purposes. The offering is expected to close on October 5, 2012.

San Antonio, Texas-based Tesoro Logistics is engaged in the ownership, operation, development and acquisition of crude oil and refined products logistics assets. The partnership currently retains a Zacks #3 Rank (short-term Hold rating).

Tesoro Logistics – which went public on April 26, 2011 – reported second quarter earnings per unit of 41 cents on August 6, beating the Zacks Consensus Estimate of 39 cents by 5%. Revenues of $33.2 million also surpassed the Zacks Consensus Estimate of $29.0 million. Results were driven by a 40% improvement in crude oil trucking volumes.

Tesoro Logistics is set to benefit from its ties with asset-rich sponsor Tesoro Corp. , which retains a 56% stake in the partnership. A sound fee-based relationship with Tesoro – the nation's second-largest independent refiner – shields the pipeline operator from competitive pressures in the midstream energy space, providing it with stable cash flows and consistent top-line growth opportunities.

Additionally, the partnership continues to leverage its relationship with Tesoro to make ‘drop-down’ transactions (or asset buys from the partnership's sponsor company). As part of this arrangement, Tesoro Logistics recently bought the Martinez crude oil marine terminal from Tesoro for $75 million and is expected to purchase more properties – including the Long Beach marine terminal and the Los Angeles short-haul pipelines – during the second half of 2012.

The ‘drop-downs’ are expected to be immediately accretive to Tesoro Logistics’ distributable cash flow, thereby boosting cash distributions. As it is, the partnership already dishes out a quarterly payout of 41 cents per unit ($1.64 per unit annualized), yielding an impressive 3.7%.

However, we believe that these positive aspects are well reflected in the current share price, leaving little room for upward movement in the near term. We are also concerned about the partnership’s lofty valuation. Units of Tesoro Logistics are going for about 24.6 times forward estimates, a 25% premium to the peer group average of 19.6x. Another headwind for us is Tesoro Logistics’ dependence on its parent company for virtually all of its revenues.

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