Tesoro Corp.’s (TSO) fourth-quarter 2009 results came in weaker than expected, pulled down by depressed refining margins and lower throughput on the back of weak fuel demand and high inventories. The situation was further aggravated by higher costs and expenses.
Loss per share, excluding certain charges, came in at 97 cents, wider than the Zacks Consensus Estimate of 85 cents. In the year-ago period, the Texas-based company earned 37 cents. However, revenue of $4.6 billion was up 40.5% from the first quarter of 2009.
Refining Segment
Tesoro’s refining segment swung to an operating loss of $169 million versus income of $177 million in the year-earlier quarter. This can be attributed to sluggish profit margins for West Coast gasoline and diesel, as well as a narrowing of the sweet/sour crude spread.
Throughput
Total refining throughput averaged 471 thousand barrels per day (MBbl/d), compared to 535 MBbl/d in the year-ago quarter. Overall throughput volumes in the California region (consisting of the Golden Eagle and Los Angeles refineries) decreased 23.4% year-over-year to 190 MBbl/d.
Throughput in the company’s Mid-Pacific (Hawaii) and Mid-Continent (North Dakota & Utah) refineries fell 9.6% and 7.9% year-over-year to 66 MBbl/d and 93 MBbl/d, respectively. However, for the Pacific Northwest refineries ( Alaska and Washington ), throughput increased 8.0% to 122 MBbl/d.
Refining Margins
Gross refining margin decreased 47.6% year-over-year to $6.36 per barrel. In terms of different regions, refining margin was down approximately 48.7% in California to $7.74 per barrel, 28.4% in the Pacific Northwest to $5.85 per barrel, 99.4% in the Mid-Pacific to $0.05 per barrel, and roughly 29.3% in the Mid-Continent to $8.60 per barrel.
Realized Costs & Prices
Manufacturing costs before DD&A increased 11.4% from the year-earlier level to $5.94 per barrel, primarily due to higher energy costs. Total refined product sales during the quarter averaged 547 MBbl/d, down 7.1% year over year. Average price realized on product sales increased 54.4% year-over-year to $87.08 per barrel. Average cost per barrel was also up 80.0% from the first quarter of 2009 to $82.82 per barrel.
Capital Expenditure & Balance Sheet
Tesoro’s total capital spending (including turnarounds) during the quarter under review was $99 million, below the company’s guidance. Tesoro informed that it expects capital spending for 2010 to be around $500 – $525 million. As of Mar 31, 2010, Tesoro had cash on hand of $290 million and long-term debt of approximately $1.8 billion, representing a debt-to-capitalization ratio of 38.5%.
Outlook
Despite the dismal results, management indicated that gasoline demand and margins showed signs of improvement during the quarter. However, we believe that the outlook for domestic refiners still remain bleak.
Refining margins have been significantly lower for quite some time now, as a result of narrower spreads on crude oil and oil products. We believe that this imbalance between supply and demand will remain in place for the next 6 – 12 months and negatively impact the bottom line.
The recent rally in crude prices has added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being a major independent refiner, Tesoro remains particularly exposed to this unfavorable macro backdrop.
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