Tesoro Upgraded For Third Time In A Month

Gasoline crack spreads grew in Q2, driven by record gasoline demand and increased diesel demand.

Citi’s Faisel Khan upgraded the rating on Tesoro Corporation TSO from Neutral to Buy, while lowering the price target from $92.50 to $92.00, following the recent pullback in the stock.

Margin Pressure

Khan cautioned that despite the growth in crack spreads, there continues to be material headwinds for refiners due to higher RIN costs and increased gasoline inventories.

Although distillates have been performing better in recent times, the gains have been offset by lower secondary product prices and rising crude prices.

“Gasoline cracks remain the key driver for refiners’ results for the remainder of 2016. Despite record gasoline demand, inventories are high on a seasonally adjusted basis,” Khan mentioned.

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Q2 Expectations

The analyst noted that Tesoro obtains a meaningful part of its cash flows from its marketing and midstream assets, and that the value of these assets has “held up better than pure refining assets.”

For Q2, Khan expects the company to report a quarter-on-quarter improvement in margins, although significantly below the prior estimates.

Tesoro’s capture is expected to have been impacted by narrowing contango and differentials.

“Following a few strong quarters, we expect marketing margins to return to normalized levels, accounting for seasonality and a sharp movement in crude prices, partially offset by gains from rising RIN costs,” the analyst said.