Tesoro's CEO Presents at Barclays CEO Energy-Power Conference (Transcript)

| About: Tesoro Corporation (TSO)

Tesoro Corporation (NYSE:TSO)

Barclays CEO Energy-Power Conference

September 11, 2013 8:25 am ET


Greg Goff - Chairman & CEO


Paul Cheng - Barclays

Paul Cheng - Barclays

Good morning. Our next presentation is Tesoro. We are very happy and excited to have CEO and Chairman Greg Goff to be with us today sharing with us all the exciting news in the company. So, without further delay, let me welcome Greg.

Greg Goff

Good morning, everyone. We really appreciate the opportunity to come today and talk about Tesoro. And really so far 2013 has actually been a very important year for the company. We’ve actually completed two significant transactions, close to completing of a third and done several of our major projects. And our progress this year really it has – it’s really set the stage for the future and we’re very optimistic about what we’ll be able to do to create value. And today I'm really excited to be able to share our story with you.

This mentions that there is some statements that I’ll make that are forward-looking statements as part of the disclosure here. This map shows little bit about our operations and I think I’d said in the past, our business model is to be a highly integrated refining, marketing and logistics company. We really manage the value across the entire value chain. And from this map you can see that in the different regions where we operate particularly from a marketing standpoint what we try to do is we go to the market because we’re very integrated and have premium brands where we have relationships with Exxon and Shell and you will see ExxonMobil and Shell brands for the premium side of the market. Then on the lower price section of the market, we use our ARCO brand, Tesoro and USA.

And in the markets where we do business actually the economies are doing pretty well and even in California over the last couple of years the California economy just continue to improve a lot and surprisingly the demand in California this year is up a little over 1% for gasoline demand. We’re seeing demand up in our retail network; it was quite extensive up over 2% when you look at demand for gasoline in United States down about a 0.5% this year. So, the overall market conditions where we operate are actually quite favorable.

Today, I have five key messages that I’d like to be able to talk about. First, as a company we’re doing a lot to really strengthen our position in California with the recent acquisition and other things we're doing we have a tremendous focus to really strengthen our position there. The second thing is we already have a very strong position in the Mid-Continent and we’re continuing to do things in the Mid-Con to strengthen our position both how we end up capital and particularly how we try to position ourselves to process more of the advantaged crude oil in the area.

Third, our focus on trying to deliver feedstock advantage to the West Coast. We’ve done stuff at our Anacortes refinery. And in a little bit in the presentation I'm going to share some of the things that we’re doing to take even far greater of price advantage crude oil to the West Coast which we believe will have a pretty significant impact both on the market and on our operations in California.

The fourth thing is around our Logistics Company. Our Logistics Company now is a little more than a couple of years old and we’ve had significant progress and success with that company, and I’d like to talk a little bit about how that fits into with what we’re trying to do with the company.

And then, finally, we just continue to invest in the business to create value but at the same time returning cash to shareholders, and I’d like to just kind of conclude the presentation today with some comments about how we prioritize the use of cash and how we see returning cash to shareholders.

The strategic priorities that we developed a few years ago they really provide the clarity, the focus and the direction for the people in the company and they really guide everything that we do and as I talk today, I’m going to address some of these strategic priorities to demonstrate the value that we are creating by our focus and commitment on these priorities.

A couple of them one really by trying to be a superior operator and really to optimize the value chain by how we capture value in our refining marketing and logistics operations. The second area to focus on is around commercial excellence because we do operate an integrated value chain, I want to be able to talk about our focus particularly on how we are driving the value by moving crude to our refiners to capture a cost advantage position from a crude supply standpoint.

And then finally, our efforts to grow the company, to grow the company to create sustainable profitability to make strategic decisions that are very accretive to the overall growth of the company.

One of our strategic priorities is around operational efficiency and effectiveness. And one of the things we try to do there is drive improvements in the business particularly with redeploying capital into the business. And we have a lot of success in how we have been able to do this. This chart that I’m showing now highlights a few of the projects over the last couple of years that we have been able to create these projects and execute them actually extremely well.

You can see on the left that we spend a little bit less than $0.5 billion on these five projects. And these five projects generate a little bit less than $400 million of EBITDA on an ongoing basis. We just completed the first phase of the Salt Lake City project just here in the first half of the year and the second phase of that project will be completed in the second half – in the latter part of 2014 and when that total project is done it will generate about $100 million a year of additional EBITDA for Salt Lake City area and the first phase will generate about half of that about $50 million. But this type of investments is one of our strategic priorities as to reinvest capital back into the business that generate high return, short paybacks and really strengthens the overall performance of the company.

This further kind of expels upon the, what we are doing from a capital spend standpoint. On the left deck, on your left you can see that over the last from 2012 to 2015, we’ll spend about $800 million on what we call high return, short payback capital projects, reinvesting in the business. Most of the projects are designed to either improve the yields at our refineries to lower operating costs are really to support our efforts to take price advantage of the crude oil into our refinery. But that $800 million investment during this time period as you can see on the right has projected cumulative impact of EBITDA of about $650 million.

So, the value of these projects is – I don’t know, if I need to do something with something bump beep now okay sorry. The value of these projects really strengthened the underlying performance of the business. And as we complete that phase of the project we are now looking at the next phase of opportunities that we can start to deploy as we go forward.

Our second strategic priority is around commercial excellence and this shows what we are trying to do. The first and one of the first area as you can see in the State of Washington there are four refineries up in the Pacific Northwest and you can see on the left up here the competition of crude supply to those refineries relative to what we have been able to do since last year. Effectively what we have done is, we have taken Bakken crude oil to our Anacortes refinery complement the Canadian crude oil that we taken there to effectively get a crude supply comparable to like a Mid-Continent refinery. So, you can see on this chart that somewhere between 70% to 90% of the crude supply to that refinery is priced off of either WTI or coming from the Mid-Continent type crude supply.

And what we are trying to do with our commercial excellence is drive that advantage even further to the West Coast and I’m going to talk about one of those opportunities in just a minute because if you look at the bottom here at the State of California with our recent acquisition of the assets in Southern California our composition of the type of crude [we run] changed quite a bit. Our two legacy assets in California are primarily heavy crude refineries either running the indigenous California crude are crudes that we import from South America but the refinery that we acquired now process is primarily ANS type crude. So, kind of a medium light crude.

And so our dependence on ANS crude has changed quite a bit. So, one of the things that we’re working on from a commercial excellence standpoint is to alter the type of crudes that we’re able to source in the State of California. Actually today we will deliver the first unit train Bakken crude oil to our refinery in Northern California. We have a unit train facility that we can now take some quantities of Bakken crude oil not to the same extent that we do up in Anacortes but into our refinery in Martinez, California to help change the dynamics of our crude supply into California.

Also, if you look at from a commercial excellence standpoint, how we supply our two refineries in the Mid-Con and both the refinery up in North Dakota and the refinery in Salt Lake City. If you start with the refinery in North Dakota, the Mandan refinery, we’ve done a couple of things there. One of the things that we’ve done is we think we’ve run the refinery at a lot higher rates than it ever did historically. And secondly we’ve done things to increase the capacity of the refinery to process more at the Bakken crude oil since we basically said on top of the oil field in North Dakota. So, the refinery today runs at around 70,000 barrels a day, very price advantage Bakken crude oil we’re able to run at full basically all year long.

The Salt Lake City like I mentioned earlier, we’re working to process more the indigenous Waxy crude oil coming out of the Uintah Basin into Salt Lake. And we completed the first phase of the project, we’re working on the second phase, they will become operational next year. And by that time a little over more than the third of the rig crude that we run the refinery will be Waxy crude and we’ll look at opportunities to be able to process even more of that price advantage crude into the future. But from a commercial excellence standpoints, we’re really been trying to drive a price advantaged crude into our refining system really everywhere we have our operations.

To talk just a little bit more about the crude supply dynamics and how we see the West Coast is being advantage. This map, looks at the State of North Dakota and it shows the growing production in the State of North Dakota with – and the industry estimates that the production in North Dakota by 2014 will be over 900,000 barrels a day with pipeline takeaway capacity less than 700,000 barrels a day. So, pretty significant amount of crude oil that have to moved by rail out of the State of North Dakota.

And as you can see from the map, the preferred destination for the crude coming out of North Dakota is the West Coast because of the advantage transportation cost to get that crude to the West Coast. And so one the things that we’re working on as a company is how do we take greater advantage of moving this crude oil both from because of the price advantage and the quality advantage to the West Coast, for example at our Anacortes refinery not only do we gain the advantage of lower transportation cost but the yield advantage versus running ANS crude there is somewhere between $3 to $5 a barrel and advantage.

So, with the – as we look at the differentials on a go forward basis for Bakken crude relative to LLS that – and the advantage that we have from a transportation standpoint to get to the West Coast, we see this is a very attractive crude to continue to try to move to the West Coast. And as a result of that, one of the things that we’re in the process of working on is developing a crude oil unloading facility in the Port of Vancouver in the State of Washington on the Columbia wherever across from Portland, Oregon to be able to take in crude really from any type of North American crude from Canadian into the Mid-Continent crudes into this facility. Initially this facility that we are jointly developing with Savage Companies will have the capacity to take about 120,000 barrels a day but can very easily be ramped up to 300,000 barrels a day capacity to deliver crude along the entire West Coast system.

So, probably one of the largest facilities in the United States to be able to do this. If you couple that with the advantage of moving the crudes to the West Coast on the rail system and you can develop a highly efficient unloading facility and load shifts to get to the West Coast, you can develop a very attractive option here. So, what we intend to do is to we have acquired the lease on this land at the end of July, we are now in the permitting process for the State of Washington. We anticipate that taking about a year for the facility to be operational a significant part of the facility already exist, actually we’ll just be installing tanks and some piping to be able to deliver to ships.

But the idea here is by being able to take our system, where we have a pretty, pretty significant pipeline gathering system in the State of North Dakota gather the crude oil ship it by rail very cost effectively to the West Coast. We then have the capability to supply all the way from Southern California to Alaska. We have already taken Bakken crude oil to Alaska and gained advantages by doing that.

But we have, we open up a pretty significant opportunity to change the crude supply dynamics on the West Coast because its our intent to be able to supply our West Coast operations particularly Southern California if you think back about the slide that I showed earlier with our dependence on like ANS crude into California to be able to take Mid-Continent crude oils where we can gain a price advantage and move that to the West Coast.

So, to kind of build upon that from our West Coast system in June of this year, we completed the acquisition in Southern California the Carson refining marketing and logistics assets and its quite encouraging that to tell you that the integration of our business into the company has gone extremely well all of the benefits that we anticipated to achieve, when we did our due diligence prior to closing on the transaction they are materializing. And the benefits as you can see on this slide from our opportunities to change the configuration of the refinery to have a material impact on the yield of the refinery particularly being able to yield more distillate. So, that everything that we thought we would be able to do, we are seeing that its going to come to fruition and we are quite optimistic about the opportunities here.

And just to put into perspective, when we looked at acquiring this business, we used the base here of 2011 and this business plus the Tesoro business had an EBITDA of about $1 billion of EBITDA and the synergies that we saw from this business represented about 25% additional EBITDA that I’ll talk in a minute. But the opportunity that we have as a company to be able to go in a very difficult place to do business, we fully understand and acknowledge that California and the refining business is if not the most difficult, its one of the most difficult places in the United States to do business. But we believe that we were able to go in and create a leading position in California because of the opportunity that this slide shows.

So, I really had to talk about the synergies. Our original estimate for synergies on the acquisition was about [$1.25] billion and you can see on the slide here on your left that happened up over about a five year period time. And the great news is that as we now have been operating the assets now for about 90 days not only are we able to validate the original synergies of about $1.25 billion, but we are actually very optimistic that we have the opportunity to capture more synergies then what we have been able to see and probably some acceleration on those synergies.

And so, we typically do an Analyst Meeting at the end of every year in December and its our intention in December to kind of layout our plans for the synergies and further integration of this business into Tesoro. But the opportunities that we see in feedstock optimization and product distribution costs and lowering the overall operating costs of the business every thing that we envisioned before we committed to the acquisition we have been able to validate and either more so.

And in addition, we had originally anticipated spending about a $1.25 billion of capital over a few years to capture those synergies and from what we are seeing to-date its not a material difference from that standpoint either. So, its quite encouraging to see that how we had kind of a vision of what we could capture by creating this business that we are going to be able to deliver that over the next few years and we’ll share more of that in December of this year.

One of the things about California and how we look at the State of California lot of people have questions about the regulatory environment. And this diagram kind of shows two critical success factors in California. One is your ability to make to really swing between gasoline and distillate and because of some of the reconfigurations, we are going to do with the business in California, we are going to create - we are going to create a complex, where we are able to produce equal amounts of distillates and gasoline and depending upon where the market – the market demand is and economics swing between what the market need. So, that the combination of the two refineries into one facility will give us that flexibility to do that and as you can see here what we believe on the vertical axis is that the greater capability you have to do that - the more success will be.

Furthermore, because of the demanding environmental regulations in California we’re able to make some pretty substantial changes that will allow us to significantly reduce CO2 which is important anywhere you do business but it’s particularly important in the State of California because they put a price on that and our ability to go and reduce CO2 emissions by 500,000 metric tons a year is quite significant. So, on the horizontal axis, you can see that we’re able to move way out to the right and create what we believe is a very competitive position.

Encouragingly the state has been taken some steps to kind of lessen the demand from a regulatory standpoint particularly in the short term. So, there is a few things going on in California that has actually making the impact of AB32 a little bit less burdens on that what was originally anticipated.

Our Logistics Company Tesoro Logistics, has been a vehicle to not only capture the embedded value from our logistics assets but also to be able to grow the company. And you can see here on this chart that a lot of the companies about only about 30 months old, we’ve had our distributions have had a compounded annual growth of about 20% was actually a very bright future, we see a lot of opportunity to continue to grow the business that fits in perfectly with our focus on driving an integrated value chain which supports whether the crude supplying to the refinery or how we choose to go out to the market. So, the Logistics Company as a standalone entity has done extremely well but it compliments perfectly what we’ve been trying to do with the – our refining marketing business.

And one of the things that really shows the success is the couple of things that we’ve done. We recently, in June we acquired a pipeline system referred to as a Northwest pipeline system that originates in Salt Lake, terminate in the State of Washington is a perfect fit for our integrated business in the Salt Lake City area. So, with our refining business in Salt Lake City and the steps we’re taking there to not only increase the capacity of the refinery to improve the yields and also to lower feedstock cost. We’re also able to now have a better integrated business model here and this system allows us to have a positive impact on how we distribute products out of the refinery.

The second thing that we’ve done with the Logistics business is part of when we acquired the assets in Southern California, the business in Southern California that acquired not only did it have a great refinery but it had a really an incredible logistical system to support that refinery both from crude into the refinery and from distribution out. And the way we structured the transaction was for our Logistics Company to acquire the logistical assets associated with that refining marketing and distribution system. We did the first transaction in June concurrent with the acquisition, we sold Tesoro Logistics about $640 million worth of logistics of assets.

We anticipate doing the second trench of assets here in the next few months for about $500 million, effectively what we’ll be able to do when we’re done is sell the logistics assets to support this business to Tesoro Logistics for a value greater than what we paid for that the PPNE part of the asset when we acquired them which include the refining the marketing the co-generation plan, coking operations and everything. So, the logistics business has been a perfect fit and being allow us to be able to grow our refining and marketing business and compliment that with a strong logistics business.

So, this just shows a little bit about what’s happened with Tesoro Logistics as a company. You can see on your left that the IPO which is back in April 2011 there was a little bit about $50 million of EBITDA with the business on an annual basis. When we complete this next drop down to other Carson assets, we’ll be a little bit less than $300 million of EBITDA in about a 2.5 year period of time of growth. And one the right hand side of the chart, what it shows you is using some market comparables for where things trade from a logistics business and where the general partners create value. You can see that the approximate enterprise values of Tesoro Logistics when we’re done with this next drop down will be a little bit less than $4.3 billion.

And in this chart, what it shows you that $4.3 billion with ownership and the general partner and the shares that we have in Tesoro Logistics is worth about $11 a share to us. So, our focus on being able to drive and grow our logistics business to complement the refining and marketing business, create value in Tesoro Logistics so that we get the value for that is actually working extremely well.

Our third priority was really around financial discipline and we stayed very focused on how we use the cash of the company really and we believe that to run the company to capture opportunities in the marketplace and to be flexible that we always need to maintain somewhere between $600 million to $750 million of cash on the balance sheet that gives us really a lot of flexibility from a commercial standpoint to do that.

The second thing is we have been targeted to maintain the leverage in the company at below 30%. When we did the acquisition with the Carson assets we bumped up from a Tesoro standpoint to about 35%, 36% but we have a very clear plan to get that leverage back down to 30%. We are in the final stages of the sale of our assets in Hawaii, where we’ll free up about $300 million of working capital that will happen in this third quarter so effectively this month.

And secondly, the sale from Tesoro to Tesoro Logistics for the logistics asset will generate about $0.5 billion and with that we’ll repay about 75% of the debt that we incurred for the Carson acquisition almost in less than a year (inaudible) the dealing get our leverage back down to a level, where we feel that we feel very comfortable particularly with [the acquisition] as we further try to grow the company. And you can also see here that we are very focused on. We have a very competitive dividend and our intend is to continue to repurchase our stock when we see it to be an attractive investment and then we are really trying to get the company to be investment grade rating.

Maybe to wrap-up here with a couple of comments on our capital spending plans. This is kind of a preliminary look of what the change in the company after the acquisition. So, 2013 was an extremely heavy year from both a turnaround standpoint and a capital spending standpoint. You can see on this chart that we kind of incorporated what we anticipate to spend with the Carson acquisition both with ongoing capital requirements from a regulatory and maintenance standpoint and also the capital that we’ll spend to capture the synergies.

But our capital spending from a company standpoint, we expect to average about a $0.5 billion on a go forward basis for regulatory, maintenance and income to grow growth capital projects. But at the same time, we’ll spend about $100 million a year on our logistics business as we go forward and we’ll provide further indications of this in December at our Analyst Meeting as we develop our business plans for the next few years.

At the same time, 2013 was an incredibly heavy year for the company from a turnaround standpoint. You can see on this chart here that we’ll peak out from a turnaround spending this year in the neighborhood of $400 million. The green bars are the legacy Tesoro assets and we were after this year, we went into an extremely low turnaround spending requirement for the our asset, the legacy Tesoro assets. But you can see as we estimate that we’ll spend more money with the Carson assets the overall assets from a maintenance standpoint so our turnaround spending bumps up a little bit but we definitely peak out this year at about $400 million. So, our turnaround in capital spending for 2013 is well in excess of $1 billion this year.

So, just to wrap-up here this slide has a little bit dated information as consensus estimates have been updated. But what it tries to show here is that it takes 2013 through 2015 and shows the free cash flow, the ability of the company to deliver free cash flow. And you can see here that it averaged about $1 billion from old estimates. The new estimates probably have it down about a quarter $200 million to $250 million a year. So, that $3 billion of free cash flow is probably something more in the neighborhood of $2.25 billion of free cash flow.

And with that free cash flow it allows us to go back and like I said here and invest in projects that we have identified that generate income about $400 million and then continue to repay off the debt we have on the Carson acquisition and then really it positions us well for shareholder distribution. So, with the step that we have taken to strengthen the company over time, the acquisitions that we made, the disposition of Hawaii and that we believe that we, the company is extremely well positioned for future profitability and actually and future growth as we go forward. I appreciate the opportunity to talk to everyone today and I think we’ll take questions here or in another room.

Question-and-Answer Session

Paul Cheng - Barclays

I think we have time for one or two questions here.

Greg Goff


Paul Cheng - Barclays

And we’ll move to the breakout session in Liberty 1 and 2.

Greg Goff


Paul Cheng - Barclays

There is a question over here.

Unidentified Analyst

Just a quick one on your investment grade rating target, what are the key metrics here being held to and how close are they getting there?

Greg Goff

Yeah there is a number of key metrics on the investment grade credit rating probably the one that the most challenging for us to get to is the agencies look at your geographical kind of dispersion and we’ve been very clear that we want to stay in our footprint and that from a credit rating standpoint that works against us because for some reason, we don’t view it as attractive to have operations spread across the U.S. but that’s probably the biggest thing that worked against us.

Unidentified Analyst

Just a detailed question on the Port of Vancouver, when did you say that project is scheduled to be completed 2014?

Greg Goff

Yeah the end of next year.

Unidentified Analyst

So, you expect pumping to take a year from July this year to July next year?

Greg Goff


Unidentified Analyst

And then its only six months of upgrading.

Greg Goff

Yeah mainly, just tanks. We’ll start once we see things going and we can start rolling the steel mat for the tanks and the facility is actually in pretty good shape already all the rail tracks and everything are in so yeah we’re optimistic we can get it by the end of next year.

Paul Cheng - Barclays

There is a question at the back.

Unidentified Analyst

Can you just discuss the opportunity a little bit more to bring Canadian heavies into your California assets and as you are viewing that any estimates on costs per barrel and also what the capital investment you are seeing to bring that - bringing those crude down into California that taken place?

Greg Goff

There is, the California heavies in the California, there is a couple of ways we can do that. One is we can do it through the Port of Vancouver. So, as we build out that facility we’re creating the capability to take heavy crude oil into there to be able to do that. The second thing we’re looking to do is bring California heavy down actually into kind of the Wyoming area and then rail it across to the Port of Vancouver like we’re doing to get it there so both ways. And we see based upon, where we project differentials that to be very, very competitive to do that. We don’t, we don’t disclose what those differentials are but we’re looking at it both ways into Port of Vancouver from Canada as well as from Wyoming from off the pipeline by rail into Vancouver.

Paul Cheng - Barclays

Well, with that, thank you everyone. We’ll move to the breakout session Liberty 1 and 2 for additional Q&A. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!