Tesoro Subsidiary to Launch IPO

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In a filing with the Securities and Exchange Commission, Tesoro Logistics LP – a newly formed subsidiary of independent refiner Tesoro Corporation (TSO ) – announced the launch of an initial public offering ("IPO") of 12,500,000 common units representing limited partner interests. The partnership also intends to provide the underwriters with a 30-day option to purchase up to 1,875,000 additional common units to cover over-allotments, if any.

Tesoro Logistics, whose common units will be listed on the New York Stock Exchange under the ticker symbol "TLLP," expects the offering to be priced in the range of $19–21 per share.

The San Antonio, Texas-based entity plans to use bulk of the net proceeds from this exercise – approximately $225 million after the estimated offering expenses – to pay back Tesoro Corp. for certain capital expenses it incurred. The residual amount will be used for debt issuance costs and working capital requirements.

In December last year, Tesoro Corp. announced plans to separate a portion of its logistics business to form a master limited partnership ("MLP") – Tesoro Logistics LP – and raise contribution worth more than $200 million through an IPO. The MLP will be engaged in the ownership, operation, development and acquisition of crude oil and refined products logistics assets.

The initial assets expected to be a part of Tesoro Logistics comprises Tesoro Corp’s crude oil gathering system in the Bakken Shale/Williston Basin area of North Dakota and Montana, eight refined products terminals in the Midwest and western U.S., a crude oil and refined products storage facility, and five related short-haul pipelines in Utah. However, San Antonio, Texas-based Tesoro Corp. will continue to own petroleum refineries and its network of convenience stores.

Tesoro Corp. is an independent refiner and marketer of refined petroleum products in the western U.S. The company operates in two segments: Refining and Retail. The Refining segment manufactures and sells gasoline and gasoline-blend stocks, jet fuel, diesel fuel, and other refined products to customers, primarily in the mid-continental and the western U.S. This segment also markets liquefied petroleum gas, petroleum coke, and asphalt.

Tesoro, which competes in the Oil Refining and Marketing industry with firms like Valero Energy Corp. (NYSE:VLO) and Sunoco Inc. (NYSE:SUN), has a Zacks #2 Rank, which translates into a short-term "Buy" rating. We are also maintaining our long-term "Outperform" recommendation on the stock.

An uptick in economic activity overseas (mainly in China and India) and prospects for higher fuel demand in the U.S. are likely to push 2011 industry margins higher than last year’s levels. Against this backdrop, we expect income from Tesoro’s refining operations to improve in 2011.

The company plans to use free cash flow and proceeds from the Tesoro Logistics IPO to reduce its debt-to-capitalization ratio of 38% in order to achieve investment grade rating for its debt.

Additionally, we believe Tesoro’s strategic actions – to improve its performance and competitiveness in a cost-effective manner – will drive the company’s profitable growth and boost its stock valuation.

In the near term, the company stands to benefit from its exposure to the premium margin West Coast region. Tesoro’s scale and diversification benefits from its portfolio of seven refineries add to the positive sentiment.