Independent refiner Tesoro Corporation (TSO) is scheduled to report its second quarter 2010 results on Wednesday, July 28, after the closing bell.
The Zacks Consensus Estimate for the to-be-reported quarter is a profit of 17 cents per share (with an upside potential of 23.5%) on revenue of $4.9 billion. In the year-ago quarter, Tesoro lost 33 cents per share.
First Quarter Recap
Tesoro’s first-quarter 2010 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.
Tesoro’s Results to Improve in the Second Quarter
After posting 3 losses in the last 4 quarters, we expect Tesoro to swing to a profit when it reports its second quarter results tomorrow, benefiting from stronger West Coast refining margins. However, the sustainability of the profit is highly uncertain given the following factors.
While transportation fuel demand has started to inch higher, growth in gasoline consumption continues to be stifled on the back of high unemployment. We believe that refinery run rates are likely to hover around the high 80’s/low 90’s during the near-to-medium term, which will ensure the continuation of robust light end product output (like gasoline, heating oil, diesel and jet fuel) from the domestic source.
Though refining margins have rebounded from the troughs of the fourth quarter, they remain way off the levels achieved a few years ago. We believe that the imbalance between supply and demand will remain in place for the next 6 – 12 months and negatively impact the bottom line.
Agreement of Analysts
As a result of the above-mentioned negative factors, there has been a strong downbeat sentiment among the analysts regarding Tesoro’s outlook. In particular, we see a notable number of estimate revisions over the past 30 days.
Out of the 18 analysts covering the stock, 7 have revised their estimates downwards for the second quarter of 2010, while just 4 have gone in the opposite direction.
Magnitude of Estimate Revisions
As a result of the negative estimate revision trend over the past 30 days, the Zacks Consensus Estimates for the second quarter of 2010 has gone down by 3 cents (from 20 cents to 17 cents). The decrease is based on weak demand on the back of high unemployment rate, above average levels of fuel inventories, and apprehensions about a lackluster U.S. economic growth.
Surprise History
With respect to earnings surprise, Tesoro has underperformed the Zacks Consensus Estimate in 3 of the preceding 4 quarters. Despite this, the company boasts of an average earnings surprise of 617.4%, which means that Tesoro has beaten the Zacks Consensus Estimate by that measure over the last four quarters. This can be attributed to Tesoro’s whopping 2,500.0% earnings beat in the third quarter of 2009. However, this positive surprise needs to be taken with a pinch of salt given the extremely low earnings numbers involved.
Driven by improved refining margins, we expect Tesoro’s bottom line to improve and see the company posting a positive earnings surprise in the second quarter.
Our Recommendation
A growing supply overhang has led to a squeeze in refiners’ profits. Tesoro’s lack of geographic diversification and heavy exposure to the weak California market has also become a major liability, in our view.
Partly offsetting the challenging macro environment are Tesoro’s scale and diversification benefits afforded by its portfolio of seven refineries and the company’s solid long-term competitive position. Tesoro has also undertaken certain strategic actions to improve its performance and competitiveness in a cost-effective manner.
Considering these counterbalancing factors, we have a cautious stance on major independent refiners like Tesoro. We believe upside for these firms will be limited over the next few months. As such, we are compelled to maintain our Zacks #3 Rank (Hold) rating on the stock over the coming 1-3 months. Our long-term recommendation for the stock remains Neutral.
The Zacks Consensus Estimate for the to-be-reported quarter is a profit of 17 cents per share (with an upside potential of 23.5%) on revenue of $4.9 billion. In the year-ago quarter, Tesoro lost 33 cents per share.
First Quarter Recap
Tesoro’s first-quarter 2010 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.
Tesoro’s Results to Improve in the Second Quarter
After posting 3 losses in the last 4 quarters, we expect Tesoro to swing to a profit when it reports its second quarter results tomorrow, benefiting from stronger West Coast refining margins. However, the sustainability of the profit is highly uncertain given the following factors.
While transportation fuel demand has started to inch higher, growth in gasoline consumption continues to be stifled on the back of high unemployment. We believe that refinery run rates are likely to hover around the high 80’s/low 90’s during the near-to-medium term, which will ensure the continuation of robust light end product output (like gasoline, heating oil, diesel and jet fuel) from the domestic source.
Though refining margins have rebounded from the troughs of the fourth quarter, they remain way off the levels achieved a few years ago. We believe that the imbalance between supply and demand will remain in place for the next 6 – 12 months and negatively impact the bottom line.
Agreement of Analysts
As a result of the above-mentioned negative factors, there has been a strong downbeat sentiment among the analysts regarding Tesoro’s outlook. In particular, we see a notable number of estimate revisions over the past 30 days.
Out of the 18 analysts covering the stock, 7 have revised their estimates downwards for the second quarter of 2010, while just 4 have gone in the opposite direction.
Magnitude of Estimate Revisions
As a result of the negative estimate revision trend over the past 30 days, the Zacks Consensus Estimates for the second quarter of 2010 has gone down by 3 cents (from 20 cents to 17 cents). The decrease is based on weak demand on the back of high unemployment rate, above average levels of fuel inventories, and apprehensions about a lackluster U.S. economic growth.
Surprise History
With respect to earnings surprise, Tesoro has underperformed the Zacks Consensus Estimate in 3 of the preceding 4 quarters. Despite this, the company boasts of an average earnings surprise of 617.4%, which means that Tesoro has beaten the Zacks Consensus Estimate by that measure over the last four quarters. This can be attributed to Tesoro’s whopping 2,500.0% earnings beat in the third quarter of 2009. However, this positive surprise needs to be taken with a pinch of salt given the extremely low earnings numbers involved.
Driven by improved refining margins, we expect Tesoro’s bottom line to improve and see the company posting a positive earnings surprise in the second quarter.
Our Recommendation
A growing supply overhang has led to a squeeze in refiners’ profits. Tesoro’s lack of geographic diversification and heavy exposure to the weak California market has also become a major liability, in our view.
Partly offsetting the challenging macro environment are Tesoro’s scale and diversification benefits afforded by its portfolio of seven refineries and the company’s solid long-term competitive position. Tesoro has also undertaken certain strategic actions to improve its performance and competitiveness in a cost-effective manner.
Considering these counterbalancing factors, we have a cautious stance on major independent refiners like Tesoro. We believe upside for these firms will be limited over the next few months. As such, we are compelled to maintain our Zacks #3 Rank (Hold) rating on the stock over the coming 1-3 months. Our long-term recommendation for the stock remains Neutral.
Read the full analyst report on “TSO”
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