Tesoro Corporation Beats on Q1 Earnings, Lags Revs - Analyst Blog

Independent refiner Tesoro Corporation TSO reported better-than-expected first-quarter 2014 earnings, owing to outstanding performance by Tesoro Logistics LP TLLP, an unit of Tesoro Corporation. Improved margins from the retail segment also favored the results.  

Earnings per share (excluding special items) came in at 71 cents, breezing past the Zacks Consensus Estimate of 39 cents.

However, the bottom line has decreased 4.1% from the year-ago adjusted earnings of 74 cents, primarily due to a sharp drop in gross refining margins along with substantial rise in operating expenses.

Tesoro Corporation reported revenues of $9,933.0 million, up 35.2% from $7,347.0 million in the comparable quarter last year. Despite the improvement, the top line failed to beat the Zacks Consensus Estimate of $10,516.0 million.   

Segmental Analysis

Refining: The segment posted an operating income of $183.0 million, reflecting a steep decline from $259.0 million earned in the year-earlier quarter due to lower margins and higher manufacturing costs.

TLLP: During first-quarter 2014, TLLP contributed roughly $62.0 million in operating profit, reflecting a whopping 158.3% hike from the year-ago quarter. The improvement can be attributed to higher liquid volumes transported through the pipeline system.

Retail: The segment earned $19.0 million, up from $15.0 million in the first quarter of 2013. The upside was supported by improved margins.  

Throughput

Total refining throughput averaged 817 thousand barrels per day (MBbl/d) compared with 512 MBbl/d in the prior-year quarter.

Overall throughput volumes in California (consisting of Martinez and Los Angeles refineries) shot up 102.7% year over year to 521 MBbl/d. Throughput in Tesoro Corporation's Pacific Northwest (Alaska and Washington) operations also increased 29.2% year over year to 168 MBbl/d.  

Moreover, throughput volumes in Mid-Continent (North Dakota & Utah) grew 2.4% year over year to 128 MBbl/d.   

Refining Margins

Gross refining margin witnessed a decrease of 23.6% year over year to $10.80 per barrel.  

Region-wise, refining margin decreased in California (24.4% year over year to $8.45 per barrel) and Pacific Northwest (29.2% to $9.04 per barrel). However, refining margin increased in Mid-Continent (5.2% to $22.56 per barrel).

Realized Costs & Prices

Manufacturing costs before depreciation and amortization increased 10.8% from the year-earlier level to $5.65 per barrel.

Total refined product sales averaged 928 MBbl/d, up 52.1% year over year.

Average price realized on product sales decreased 5.7% year over year to $114.87 per barrel and average cost per barrel declined 5.2% to $105.34 per barrel.

Increased Operating Cost

Tesoro Corporation's operating costs in the quarter came in at $591.0 million, a significant increase of 60.6% from the year-ago quarter.

Share Repurchases

In first-quarter 2014, Tesoro Corporation repurchased roughly $100.0 million worth of stocks.

The company returned roughly $135.0 million to stockholders in the first quarter of 2014, through share buyback programs and dividend payments.

Capital Expenditure & Balance Sheet

Tesoro Corporation's total capital spending during the first quarter totaled $103.0 million (66.0% directed toward refining segment).

As of Mar 31, 2014, Tesoro Corporation had $798.0 million cash on hand and total debt of $2,835.0 million, representing a debt-to-capitalization ratio of 34.0%.

Guidance

The company maintains its plan to invest roughly $670.0 million in 2014 (excluding the TLLP investment). Tesoro Corporation continues to project turnaround costs of around $205.0 million for 2014.

Zacks Rating

Tesoro Corporation currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.   

Meanwhile, one can look at better-ranked players in the oil refining and marketing sector like Phillips 66 Partners LP PSXP and NGL Energy Partners LP NGL. Phillips 66 Partners sports a Zacks Rank #1 (Strong Buy), while NGL Energy Partners carries a Zacks Rank #2 (Buy).