Buoyed by favorable trends in the refining industry along with the company’s initiatives to improve reliability and reduce operating costs, we have upgraded independent refiner Tesoro Corporation (TSO) to ‘Outperform’ from ‘Neutral’.
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.
Tesoro has recently spun off a portion of its logistics business to form a master limited partnership – Tesoro Logistics LP – and expects to raise a contribution worth more than $200 million through an IPO. Tesoro plans to use free cash flow and proceeds from the offering to reduce its debt-to-capitalization ratio of 37% 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 exposure to the premium margin West Coast region. Tesoro’s scale and diversification benefits afforded by its portfolio of seven refineries add to the positive sentiment.
As such, we believe Tesoro is well positioned going forward and view it as an attractive investment. Our long-term Outperform recommendation is supported by a Zacks #1 Rank (short-term Strong Buy rating).
San Antonio, Texas-based 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 competes in the ‘Oil Refining and Marketing’ industry with firms like Valero Energy Corp. (VLO), Sunoco Inc. (SUN) etc.