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Tickers in this Article: TSO, CVI, HFC, ALJ
Independent refiner Tesoro Corporation (TSO) swung back to profit in the fourth quarter of 2012 compared to a net loss a year earlier on the back of higher margins and a significant crude oil differentials advantage.

Earnings per share (excluding special items) came in at $1.34, missing the Zacks Consensus Estimate of $1.38 but improving significantly from the year-ago adjusted loss of 87 cents.

The San Antonio, Texas-based firm reported revenue of $8,273.0 million for the three-month period ending Dec 31. This was 15.4% above our projection and was also up 7.3% year over year on the back of higher throughput and solid refining margins.

Segmental Analysis

Refining: Tesoro's Refining segment posted an operating income of $106 million against loss of $123 million in the year-earlier quarter. The improvement can be attributed to higher refinery throughput rates.

Retail: The Retail unit earned $44 million during the December quarter, up from $27 million in the fourth quarter of 2011. The growth was aided by higher fuel margins.

Throughput

Total refining throughput averaged 604 thousand barrels per day (MBbl/d) compared with 567 MBbl/d in the year-ago quarter.

Overall throughput volumes in California (consisting of the Golden Eagle and Los Angeles refineries), Pacific Northwest (Alaska and Washington) and the Mid-Continent (North Dakota & Utah) increased 3.3%, 15.1% and 7.0% year over year to 249 MBbl/d, 160 MBbl/d and 123 MBbl/d, respectively.

However, throughput in the company's Mid-Pacific (Hawaii) operations remained unchanged from the fourth quarter of 2011 at 72 MBbl/d.

Refining Margins

Gross refining margin saw a robust increase of 136.7% year over year to $14.25 per barrel.

In terms of different regions, refining margin increased in California (by 547.7% year over year to $11.14 per barrel), in Mid-Pacific (by 182.4% to $3.57 per barrel), in Pacific Northwest (by 125.2% to $13.42 per barrel) and Mid-Continent (by 30.4% to $27.88 per barrel).

Realized Costs & Prices

Manufacturing costs before depreciation and amortization fell 6.6% from the year-earlier level to $4.70 per barrel, in keeping with Tesoro's stated objectives of reducing operating costs and increasing throughput rates.

Total refined product sales during the quarter averaged 694 MBbl/d, up 2.2% year over year. Average price realized on product sales decreased 2.8% year over year to $115.72 per barrel and average cost per barrel also decreased 6.8% to $105.18 per barrel.

Capital Expenditure & Balance Sheet

Tesoro's total capital spending during the quarter under review was $176 million (82% directed toward refining segment). The company informed that it expects capital spending for 2013 at around $530 million, together with turnaround spending of around $310 million.

As of Dec 31, 2012, Tesoro had $1,639.0 million cash on hand and total debt of $1,590.0 million, representing a debt-to-capitalization ratio of 25%.

Dividend Hike

Tesoro announced a 33.0% increase in its quarterly dividend to 20 cents per share, or 80 cents per share annualized. The dividend is payable on Mar 15, 2013 to shareholders of record on Feb 28.

Zacks Rating

The company 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.

Management at Tesoro is paying greater attention to improving business processes, reducing operating costs, enhancing the integration of the refining portfolio and investing in organic growth. Tesoro is involved with a number of high-return projects that are expected to be cost effective. These projects will not only boost the company's competitive position among its peer group, but will also provide significant earnings and cash flow growth visibility.

However, the inherent volatility of the refining business reduces the accuracy and reliability of long-term earnings and revenue estimates. Additionally, results are exposed to unplanned shut-downs that may have a lingering impact.

But there are certain other companies in the oil refining and marketing industry that are expected to perform well in the coming one to three months. These include CVR Energy Inc. (CVI) with a Zacks Rank #1 (Strong Buy), and Alon USA Energy, Inc. (ALJ) and HollyFrontier Corporation (HFC) with Zacks Rank #2 (Buy).
 

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