Tesoro Remains One Of Only Two Buy Ratings From Bank Of America Among Independent Refiners

Tesoro Corporation TSO remains Bank of America Merrill Lynch's one of only two Buy ratings within independent refining sector despite being cautious on the sector. The other Buy-rated stock is Marathon Petroleum Corp MPC.

Analyst Doug Leggate noted that Tesoro's marketing business deserves a 3x multiple uplift and the market is ignoring the prospects of the business.

"[P]ublicly traded retail benchmarks suggest the risk profile of the more stable free cash flow stream with lower required capital is being awarded a multiple premium by the market that can conservatively be assessed at approximately 3x," Leggate wrote in a note.

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"Our analysis suggests the delta on current EBITDA of about $800mm that itself is running ahead of management's targets is reasonably approaching $20/sh," Leggate continued.

In addition, the analyst expects Tesoro to display improved operating margins versus peers for the third quarter on a reversal of seasonal margin trends.

"All refiners have embedded trading ‘options' on seasonal margin trends that typically start in late Fall. At its core, this is a call on earnings momentum that typically troughs in Sep/Oct as margins fall from peak summer highs with a view towards anticipating summer margin strength," the analyst said.

"On the west coast, which dominates TSO's earnings this trend was inverted during the most recent summer driving season," Leggate added.

As a result, the analyst raised his price target to $109 from $95.