Higher Margins Fuel Tesoro Profit

Independent refiner Tesoro Corporation (TSO) came out with impressive first-quarter 2011 results, driven by higher throughput, improved margin environment and solid operational performance.

Earnings per share came in at 74 cents, comfortably surpassing the Zacks Consensus estimate of 61 cents and reversing the year-ago loss of 97 cents (excluding certain charges).

The San Antonio, Texas-based firm reported revenue of $6,526.0 million for the three-month period. This was 9.8% above our projection and was up 41.7% year-over-year.

Segmental Analysis

Refining: Tesoro’s ‘Refining’ segment swung to an operating income of $303 million versus a loss of $169 million in the year-earlier quarter. This can be attributed to higher refinery throughput rates, significant crude sourcing advantage, and strong sweet/sour crude spread.

Retail: The ‘Retail’ unit earned $2 million during the three-month period, down from $24 million in the first quarter of 2010, pulled down by lower fuel margin.


Total refining throughput averaged 561 thousand barrels per day (MBbl/d), compared to 471 MBbl/d in the year-ago quarter.

Overall throughput volumes in the California region (consisting of the Golden Eagle and Los Angeles refineries) increased 30.5% year-over-year to 248 MBbl/d. Additionally, throughput in the company’s Mid-Pacific (Hawaii), Mid-Continent (North Dakota & Utah) and Pacific Northwest refineries ( Alaska and Washington) rose 4.6%, 17.2% and 10.7% year-over-year to 69 MBbl/d, 109 MBbl/d and 135 MBbl/d, respectively.

Refining Margins

Gross refining margin jumped 125.3% year-over-year to $14.33 per barrel. In terms of different regions, refining margin was up approximately 115.3% in California to $16.66 per barrel, 128.9% in the Pacific Northwest to $13.39 per barrel, and 141.5% in the Mid-Continent to $20.77 per barrel. However, margins in the Mid-Pacific region turned to a negative $3.05 per barrel from a profit of 5 cents per barrel in the first three months of 2010.

Realized Costs & Prices

Manufacturing costs before depreciation and amortization fell 12.1% from the year-earlier level to $5.22 per barrel, in keeping with Tesoro’s stated objectives of reducing operating costs and increasing throughput rates.

Total refined product sales during the quarter averaged 615 MBbl/d, up 12.4% year over year. Average price realized on product sales increased 30.1% year-over-year to $113.33 per barrel. Average cost per barrel was also up 20.7% from the first quarter of 2010 to $99.98 per barrel.

Capital Expenditure & Balance Sheet

Tesoro’s total capital spending during the quarter under review was $42 million, while $9 million was exhausted towards turnaround. The company informed that it expects capital spending for 2011 to be around $380 million, together with turnaround spending of around $160 million.

As of March 31, 2011, Tesoro had cash on hand of $724 million and total debt of $1,927.0 million, representing a debt-to-capitalization ratio of 36.7%.

Our Recommendation

Tesoro, which competes in the ‘Oil Refining and Marketing’ industry with firms like Valero Energy Corp. (VLO) and Sunoco Inc. (SUN), has a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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