Tesoro: An Aggressive Way to Play a Short Term Oil Pullback

Don't abandon Tesoro (TSO) just yet. I have already stated I am bullish Valero (VLO) for the next quarter, as a more conservative play on the decreasing and or holding of the price of oil in the short term. Nothing goes straight up, and oil is no different. It will have to take a breather at some point and many things are pointing to it slowing or backing up here. I still believe that oil will be higher than it is today at the end of the year, unless there is an unforeseen change in the immediate future. Tesoro is a much more aggressive way to play a short term pull back in the price of oil. On 5/29 we had a major shift in momentum and oil only recovered a little of that today.

Tesoro has had an impressive run. Over the last five years, they have had a CAGR of 101%. Their growth is attributed to five refinery acquisitions since 1998, including two in the highly profitable west coast regions. 82% of their throughput is in the West Coast. With these acquisitions, they have acquired a large debt and that is the major downside to an investment in this company. Also, the economy is slowing.

One optimistic side to the argument gas prices will catch up to crude is by comparing the prices with respect to time frame. In 2007, the driving season was very profitable with respect to the refiners. In late March of 2007, we see a major increase in the price of gas until June of 2007. Due to decreased demand, oil prices passed gasoline percentage wise in July. By the end of 2007 oil prices were up 70% while gas prices were up 30%. Demand for gasoline on the West Coast decreased 1.8% the second half of 2007. Also, last year unemployment in the United States increased to 5%, but in California it rose to almost 6%. These conditions continued into 2008 with the increase in the price of oil and California's unemployment rate increasing to 6.2%.

Even with all of this bad news, it seems as though Tesoro's future is looking better. They have currently worked through their large inventories and now sit at a five year low. Although crack spreads are at historic lows they have improved recently.

Also, distillates are priced well due to international demand. They are planning to increase distillate yield by 19% this year and decrease heating oil 10% to increase profits. This plus their decreased capital spending and cost structures should help earnings. Lastly, the large increase in oil leads me to believe the top in gasoline prices have not happened yet. Generally, gas prices are fairly close to their high levels for the year now, but oil price could change that as they are still trying to catch up to the price of oil.

Tesoro seems well priced going forward. The current drop in from $65.98 over the past 52 weeks looks to have some positive momentum going forward although the current bearish trend has not been altered. I believe the refiners will have room for increases as the price of gas continues to increase and oil's run is either slowed or pulls back in the near term.

Disclosure: Long

Comments

[The Stockac...:]

Good company true, but SWN, STR, and NE are far better... read about them carefully... you will be glad you did... I now also like PBR at this great price too... was waiting for this PBR pullback, now buying it tommorrow... PBR going to $90 in next 3 months, then to $145 by next year this time... never forget PBR... it is the leader of leaders in the field, and next quarter's earnings at these novel April and May crude prices will be astonishing for such a large company... never before in history has there been an announcement of earnings like the one expected for PBR... get ready... I may buy 20,000 shares tommorrow... and hold past the next 3 quarters. Each announcement by PBR is more spectacular than the last... the stock usually pulls back a bit before earnings, then heads strait up just before and into the announcement... sometimes regardless of the price of crude... Kindest regards... The STOCKACCUMULATOR

2008 Jun 02 08:34 PM

[legmaker:]

I love PBR also, and you could very well be right with respect to that growth. It is an amazing company with alot of growth potential.

2008 Jun 03 10:47 AM

[jwaydog:]

Everyone keeps wishfully hoping that decreasing oil prices will fix profitability issues for the likes of TSO. Most likely a short term pullback in oil means $115 to $125 per barrel. When you consider the relative weakness of gasoline demand, the crack spread is still not that great. One must factor in the increase in operating costs for the refineries in 2008 (which negates a couple of dollars of improved crack spread). Furthermore, TSO has yet to earn a profit on their forays into the retail segment. Debt to equity ratio of .702 in a low margin business with rising input and operating costs and waning demand for the finished product do not indicate a buy. As if this was not enough, we are entering hurricane season (just a hint of a big storm will send oil prices spewing higher). TSO's best hope is a takeover. Tuesday I bought July 22.50 puts on TSO for a song. So far so good.

2008 Jun 04 11:54 AM