Our Underperform recommendation on Tesoro (TSO) shares takes into account the bearish refining margin outlook. A growing supply overhang in the face of a recession-induced fall in global oil product demand 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.
With the outlook for domestic refiners remaining bleak, we see little reason for investors to own the stock as the ongoing long-term fundamental changes to the industry indicate struggle. The major factor that could negatively impact refining profitability is the shifting balance in supply and demand with capacity additions outpacing incremental demand.
Tesoro’s weaker-than-expected second quarter results have further added to this negative sentiment. The second largest refiner in the western U.S. posted a second-quarter loss of 33 cents per share, which was below the Zacks Consensus Estimate of 30 cents. These figures reflect lower gross margins and decreased throughout on the back of weak fuel demand and high inventories.
While near-term financial results will be poor, we also believe that cash flows will be highly volatile throughout the refining cycle. We see limited room for margin gains over the coming months, given the current gasoline and distillate inventory levels and the overall low utilization rate.
Given these headwinds, we expect Tesoro shares to be under pressure in the medium- to long-term until fundamentals in the refining market improve meaningfully.
Read the full analyst report on “TSO”
Zacks Investment Research