Independent refiner Tesoro Corporation (TSO) reported second-quarter 2014 adjusted diluted earnings per share of $1.70, which missed the Zacks Consensus Estimate of $1.83 per share. Lower refining margins as well as a significant rise in operating costs led to the miss.
However, the bottom line was higher than $1.56 per share earned in the year-ago quarter. The performance was aided by addition of the Los Angeles refining, marketing and logistics assets, increased contribution from Tesoro Logistics LP (TLLP) and higher retail margins.
Tesoro Corporation reported quarterly revenues of $11,104 million, up 24.8% from $8,897 million in the comparable quarter last year. Revenues also easily beat the Zacks Consensus Estimate of $9,219 million. Higher throughput volumes aided the results.
Refining: The segment posted an operating income of $372 million, lower than $375 million earned in the year-earlier quarter. Lower refining margins, which led to the decline, were partially offset by improved synergies and addition of the Los Angeles refinery.
TLLP: During second-quarter 2014, TLLP contributed $50 million in operating profit, substantially higher than $20 million in the year-ago quarter. The improvement can be attributed to addition of the Los Angeles logistics assets and the Northwest Products System.
Retail: The segment earned $72 million, a large rise from $25 million in the second quarter of 2013. The upside was driven by higher fuel sales.
Total refining throughput averaged 816 thousand barrels per day (MBbl/d) compared with 624 MBbl/d in the prior-year quarter.
Overall throughput volumes in California (consisting of Martinez and Los Angeles refineries) increased about 40% year over year to 523 MBbl/d. Throughput in Tesoro Corporation’s Pacific Northwest (Alaska and Washington) operations increased 9.6% year over year to 160 MBbl/d. Moreover, throughput volumes in Mid-Continent (North Dakota & Utah) grew 27.9% year over year to 133 MBbl/d.
Gross refining margin witnessed a decrease of 9.5% year over year to $13.35 per barrel.
Region-wise, refining margin recorded a decrease of 3% to $12.16 per barrel in California, 26.3% to $9.12 per barrel in Pacific Northwest and 11.1% to $23.01 per barrel in Mid-Continent, all on a year-over-year basis.
Realized Costs & Prices
Manufacturing costs before depreciation and amortization increased about 9% from the year-earlier level to $5.88 per barrel.
Total refined product sales averaged 950 MBbl/d, up 27% year over year.
Average price realized on product sales rose about 3% year over year to $123.35 per barrel and average cost per barrel was up about 2% to $110.98 per barrel.
Tesoro Corporation’s operating costs in the quarter came in at $598 million, a significant increase of 35.6% from the year-ago quarter.
Share Repurchases & Dividends
In second-quarter 2014, Tesoro Corporation repurchased roughly $100.0 million worth of stocks. The company returned roughly $132 million to stockholders in the reported quarter through share buyback programs and dividend payments.
Tesoro Corporation also announced that a $1 billion share repurchase program has been approved by its board. This new share repurchase plan will be effective after completion of the company’s existing $1 billion share repurchase program, which is expected by the year end.
The company also announced an increase in its regular quarterly cash dividend. The new dividend of 30 cents per share marks a sequential rise of 20%. The new dividend will be paid on Sep 15 to shareholders of record as of Aug 29.
Capital Expenditure & Balance Sheet
Tesoro Corporation’s total capital spending in the reported quarter totaled $167 million (56.3% directed toward refining segment).
As of Jun 30, 2014, the company had $1,239 million cash on hand and total debt of $3,055 million, representing a debt-to-capitalization ratio of 36%.
Tesoro Corporation lowered its capital spending guidance to $625 million from the earlier estimate of $670.0 million in 2014 (excluding the TLLP investment). The company also mentioned that TLLP capital spending has been increased by 25% to about $200 million to accommodate costs associated with constructing the Connolly Gathering System and the Anacortes truck rack.
Tesoro Corporation continues to project turnaround costs of around $195 million for 2014. The company added that deferred retail branding costs for full-year 2014 are anticipated to be $25 million, 50% lower than the earlier guidance.
Tesoro Corporation currently carries 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.
Meanwhile, one can consider better-ranked players in the oil refining and marketing sector like Eagle Rock Energy Partners, L.P. (EROC) and Ferrellgas Partners LP (FGP), both of which sport a Zacks Rank #1 (Strong Buy).
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