The Federal Trade Commission (FTC) has permitted Tesoro Corporation (TSO), an independent refiner, to acquire Northwest Products system from the U.S. energy giant Chevron Corporation (CVX). However, the U.S. antitrust regulators have imposed a condition.
Per the authorization, Tesoro can buy the 760 miles of Northwest Products Pipeline system and some terminals if it divests a Boise, Idaho-based petroleum terminal within six months.
In December last year, Tesoro inked a contract with Chevron to buy the pipeline assets for a total consideration of $400 million. However, later on the price was fixed at $355 million after negotiations. Following the closure of the deal, Tesoro will own two out of the three terminals in Boise. According to FTC, this will allow Tesoro to gain tremendous market dominance there, which requires it to divest one of the two Idaho facilities.
Last month, Tesoro got the consent of FTC to acquire southern California-based refining business of oil major – BP plc (BP) – for a total consideration of $2.5 billion. However, Tesoro was not required to divest any property for that deal.
San Antonio, Texas-based Tesoro operates in two segments: Refining and Retail. The company is involved in a number of high-return projects that are expected to be cost effective. These projects will not only boost Tesoro’s competitive position among its peer group but will also provide significant earnings and cash flow growth visibility.
However, in terms of geographic diversification, Tesoro’s lack of exposure to the other refining regions in the country weakens its competitive positioning. The company’s West Coast operations and heavy dependence on the weak Californian market act as major liabilities.
Tesoro 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 1 to 3 months.
Meanwhile, one can look at Ferrellgas Partners LP (FGP), as a good buying option. The energy stock – sporting a Zacks Rank #1 (Strong Buy) – has solid secular growth stories with the potential to rise significantly from the current levels.
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