Tesoro Continues To Create Value As Carson Deal Nears Approval

| About: Tesoro Corporation (TSO)

Shares of Tesoro (NYSE:TSO) are ending the trading week with solid gains. Shares of the independent petroleum refiner rose sharply from $51 on Wednesday to highs of $56 on Friday, following the publication of its first quarter results on Wednesday afternoon. Despite the rally over the past week, and year, there is more upside potential for shares following a successful completion of the Carson refinery acquisition.

First Quarter Results

Tesoro generated first quarter revenues of $8.16 billion, up 4.3% on the year before. Analysts were dead wrong on their revenue estimates, as consensus estimates for first quarter revenues stood at merely $6.58 billion.

As a result of relatively lower cost of sales, operating income after allocation of corporate costs advanced some 43.3% to $192 million. Operating margins, which are really thin in the refining industry, were up by 64 basis points to 2.35%.

Net earnings attributable to shareholders rose 66% to $93 million, or $0.67 per diluted share. Excluding $9 million in charges related to the acquisition of BP's Southern California refining business, earnings per share came in at $0.73 per share. Adjusted earnings were in line with consensus estimates of $0.73 per share

CEO Greg Goff commented on the performance during the first quarter: "We are pleased with our first quarter results, which reflect a solid operating performance and continued execution of our strategic plan. We completed a major portion of our planned turnaround activity for 2013; developed the next phase of our West Coast crude oil strategy with the formation of the Tesoro-Savage joint venture and began the process to cease crude oil refining operations in Hawaii."

A Look Into The Results

Refining segment operating income advanced to $287 million, mainly on the back of favorable market conditions. Total throughput was up 50,000 barrels per day, coming in at 579,000 barrels per day as Tesoro processed more heavy crude.

Refining margins rose to $13.68 per barrel, up 12.6% on the year, while solid execution resulted in a 2.2% decline in manufacturing costs to $4.86 per barrel.

The retail segment saw some improvements as well. The total number of operated fuel stations increased by 190 to 1,405 as the company acquired 174 stations from Thrifty Oil Company and another 49 Albertson's Fuel Express stations. Fuel margins increased from twelve cents to $0.20 per gallon resulting in operating income of $17 million for the time period, which compares to a $4 million loss last year.


Tesoro ended its first quarter with $1.97 billion in cash and equivalents and $1.59 billion in short and long term debt, for a net cash position of around $380 million.

For the full year of 2012, Tesoro generated revenues of $32.97 billion on which the company reported a net profit of $743 million, for diluted earnings of $5.25 per share.

Factoring in a 6% jump in Tesoro's share price towards $54 per share, the market values the company at $7.4 billion, valuing operating assets around $7 billion. This values the company at around 0.25 times annual revenues and 9-10 times annual earnings.

Tesoro currently pays a quarterly dividend of $0.20 per share, for an annual dividend yield of 1.5%.

Some Historical Perspective

Long term investors in Tesoro have seen great returns, accompanied by even greater volatility. Shares advanced from lows of $4 in 2003 to peak around $65 in 2007.

Shares fell all the way to $8 in 2008 as the sluggish economy pushed refiners in the red. Shares consolidated in the following years, but have risen from $20 during the spring of 2012 to highs of $60 earlier this year. At the moment, shares are exchanging hands at around $54 per share.

Between 2009 and 2012, Tesoro has roughly doubled its annual revenues to $33.0 billion. The company improved its profitability each sequential year after reporting a $140 million loss in 2009.

Investment Thesis

The first quarter of 2013 was solid as shares of the company rose another 22% so far year to date, despite a recent sell-off, amidst a generally favorable refining environment.

Tesoro furthermore returned a lot of cash to its shareholders by raising its quarterly dividend to $0.20 per share. The company also bought 2 million of its own shares during the quarter, retiring its shareholder base at a pace of 5.8% per annum. As a result of the buybacks, the company has some $255 million remaining as part of its $500 million authorized share repurchase program.

Other good news is that the company expects to near the end of the regulatory review of its planned acquisition of the Carson refinery announced last year. The company already expanded its revolving credit facility towards $3.0 billion to finance the $2.5 billion planned acquisition.

While the valuation is already appealing based on current operations, the prospects remain good fueled by the highly accretive deal with BP Plc (NYSE:BP). With estimated synergies of $250 million per annum following the deal, Tesoro should easily be able to report annual profits surpassing the $1 billion mark in today's environment.

On top of the planned acquisition of the Carson refinery, Tesoro recently announced a joint-venture with Savage to develop and operate a new unit train unloading and marine loading facility in Vancouver, with an initial capacity of 120,000 barrels per day. The $75-$100 million facility is expected to be operational in 2014, and could in the long term be expanded to 280,000 barrels per day.

Tesoro remains a stellar long term potential. At the presentation of the deal with BP back in August, I wrote that management has created more value than the current share price reflected. From that point in time shares have risen some 35% to current levels around $54 per share.

I reiterate my stance from last year. I am a buyer of the shares in anticipation of new all time highs around $65 in the medium to long term.

Disclosure: I am long TSO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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