Supported by continued favorable trends in the refining industry along with initiatives to improve reliability and reduce operating costs, we have maintained our Outperform recommendation on refiner Tesoro Corporation (TSO) with a price target of $29.
San Antonio, Texas-based Tesoro is an independent refiner and marketer of refined petroleum products in the western U.S. The company operates in two segments: Refining (accounted for 72% of the company’s total 2010 operating income) and Retail (28%).
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 the western U.S. This segment also markets liquefied petroleum gas, petroleum coke, and asphalt.
Currently, the company owns and operates seven refineries, with a combined crude oil processing capacity of approximately 665,000 Bbl/d, located in California (approximately 39% of the company’s total refining capacity is located in California), Alaska (11%), Washington (18%), Hawaii (14%), North Dakota (9%), and Utah (9%).
We are optimistic about the refining sector given the improvement in economic activity overseas (mainly in China and India) and prospects for stronger fuel demand in the domestic market. These are likely to push 2011 industry margins higher than the last year’s level. Against this backdrop, we expect income from Tesoro’s refining operations to improve in 2011.
Additionally, we believe Tesoro’s strategic actions to improve its performance and competitiveness in a cost-effective manner – will drive the company’s profitable growth and boost its stock valuation. Tesoro’s scale and diversification benefits, afforded by its portfolio of seven refineries, add to the positive sentiment.
As such, we believe Tesoro – which competes with established firms like Valero Energy Corp. (VLO), Sunoco Inc. (SUN) etc. – is well positioned going forward and view it as an attractive investment.
SUNOCO INC (SUN): Free Stock Analysis Report
TESORO CORP (TSO): Free Stock Analysis Report
VALERO ENERGY (VLO): Free Stock Analysis Report
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