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Tickers in this Article: BP, TSO
Tesoro Refining & Marketing Co., a subsidiary of petroleum products refiner and marketer Tesoro Corporation (TSO), was recently awarded a Department of Defense contract worth $10.6 million. Per the contract, Tesoro will supply fuel to the government.

The one-year contract is being managed by the Defense Logistics Agency Energy. We view this contract as a positive for Tesoro as this will bring cash flows for the company.

San Antonio, Texas-based Tesoro Corporation is an independent refiner and marketer of refined petroleum products in western U.S. The company operates in two segments: Refining and Retail. The Refining segment manufactures and sells gasoline and gasoline-blend stocks, jet fuel, diesel fuel, and other refined products to customers, primarily in the mid-continental and western U.S. This segment also markets liquefied petroleum gas, petroleum coke, and asphalt.

We maintain our long-term Outperform recommendation on the stock, supported by a Zacks #2 Rank (short-term Buy rating).

Tesoro is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 675,000 Bbl/d. A major advantage for the company is the scale and diversification benefits afforded by its portfolio of seven refineries.

During the last few quarters, the jump in crack spreads - the conventional measure of refining profitability - has favorably impacted Tesoro's earnings. With crude crack spreads set to widen in the near future, we see a further boost in the company's profitability and valuation.

We believe that Tesoro's capital investment program highlights its efforts to capitalize on high-return short payback projects that are expected to have long-term positive effects for the firm.

Our positive stance also revolves around Tesoro's proposed acquisition of BP Plc's (BP) Southern California refinery, which, apart from boosting refinery capacity, will also improve the company's operational efficiency.


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