Seeking Alpha
Long only, contrarian, special situations, value
Profile| Send Message| ()  

Barclays came out today with a bold call on refiner Tesoro (TSO) stating it believes the company's valuation can nearly double to $120 a share. The core driver of upside is the smooth acquisition of BP Plc's (BP) refinery assets in California which was just granted regulatory approval. I first highlighted Tesoro back in June 2012 on the back of another key analyst upgrade. The shares traded for $22 a share at that time. They are now at just under $62 a share. Although not as bullish as Barclays, I still believe the shares have significant upside as they have attracted other catalysts.

Other positive catalysts for Tesoro:

  • Credit Suisse recently named Tesoro and Marathon Petroleum (MPC) as its two most undervalued stocks in the refinery sector. It also lifted its price target on TSO from $70 to $74 in Mid-May.
  • The company recently reported quarterly earnings that beat earnings expectations by two pennies a share. Revenue came in over $1B over the consensus.
  • Oppenheimer laid out four reasons in April it was positive on the refinery space including Tesoro.

4 additional reasons Tesoro has positive upside from $62 a share:

  1. Consensus earnings estimates for FY2014 had already moved up nicely over the past two months. The quick approval on BP's assets should lead to further upward revisions for earnings for both FY2013 & FY2014.
  2. Even with its incredible run up over the last year, TSO still sports a five year projected PEG of under 1 (.92).
  3. The company more than quadrupled its operating cash flow between yearend 2010 and the conclusion of FY2012. The stock sells for less than 5x operating cash flow currently. It is working on infrastructure projects to bring cheaper crude from the Bakken to its refineries on the West Coast which should provide a nice margin boost when completed.
  4. The company has a solid balance sheet. It reintroduced its cash dividend policy in August and pays a 1.3% yield which I think will be increased substantially in the coming years. It also authorized a $500mm stock repurchase program (~6% of float) at that time as well.
Source: Tesoro: Analyst Believes Refiner Can Nearly Double