Tesoro And Valero Investors: Morgan Stanley Just Met With Management

In a report published Monday, Morgan Stanley analysts mentioned the similarities they found in the two investor meetings they hosted in San Antonio. Both

and

highlighted "continuing transformations and a forward refining cycle with higher lows and higher highs," the analysts said.

"There has been a fundamental shift in the way VLO evaluates major capital projects and manages its asset portfolio. While the prior focus was on executing multi-billion dollar refining projects with long lead times that materially impact NPV, the current approach is to balance long-term investments with quick hit projects that improve efficiency and generate high IRRs and grow midstream value. VLO's lower forward capex allows for increasing shareholder returns. Management also sees a forward refining cycle with higher highs and higher lows driven by US cost advantaged system, increased VLO feed-stock flexibility and growing crude-on-crude competition, supporting strong cash flows and shareholder returns." The duration of the cycle should also be elongated by the US refining industry's focus on optimization and midstream vs. capacity expansion.

"The California market remains tight given better demand and reduced supply. Management believes that at full capacity PADD 5 gasoline market is oversupplied by 40mbpd. In the current environment, with both Torrance and Martinez down, market is short ~50-80mbpd on gasoline. With Martinez start-up, we expect California will remain tight and TSO should have improved profitability vs. 1Q15.TSO longer-term strategy remains in tactas, TSO does not see the need for any major changes to its existing growth strategy for its midstream business and projects remain on track. The Port of Vancouver project continues to await regulatory approval and we see project timing risk. We see upside potential to TSO's retail growth and believe that could become a newer element to TSO's longer-term (2017) EBITDA growth objective and refining diversification goal. Given management's leading track-record on strategic and accretive growth, we expect TSO will continue to grow into its leading multiple." The EPS estimate for 1Q15 has been reduced to $1.51 for TSO and from $1.99 to $1.59 for VLO.