Tesoro Corporation’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 goodwill impairment charges, came in at 99 cents, wider than the Zacks Consensus Estimate of 93 cents. In the year-ago period, the Texas-based company earned 99 cents. However, revenue of $4.7 billion was up 10.1% from the fourth quarter 2008 level.
Refining Segment Results
Tesoro’s refining segment swung to an operating loss of $213 million vs. income of $153 million in the year-earlier quarter. This can be attributed to struggling profit margins for the production of distillate fuels (like heating oil and diesel), as well as a narrowing of the sweet/sour crude spread.
Throughput
Total refining throughput averaged 530 thousand barrels per day (MBbl/d), compared to 555 MBbl/d in the year-ago quarter. Overall throughput volumes in the California region (consisting of the Golden Eagle and Los Angeles refineries) decreased 7.6% year-over-year to 232 MBbl/d. Throughput in the company’s Pacific Northwest refineries (Alaska and Washington) fell 5.1% year-over-year to 131 MBbl/d. For the Mid-Pacific (Hawaii) and Mid-Continent (North Dakota & Utah) refineries, throughputremained steady at 67 and 100 MBbl/d, respectively.
Refining Margins
Gross refining margin decreased 56.9% year-over-year to $5.37 per barrel. In terms of different regions, refining margin was down approximately 56.7% in California to $5.92 per barrel, 91.4% in the Mid-Pacific to $1.99 per barrel, and roughly 47.8% in the Mid-Continent to $8.78 per barrel. Bucking the trend, refining margin in the Pacific Northwest was up from $1.83 per barrel in the previous-year period to $3.39 per barrel.
Realized Costs & Prices
Manufacturing costs before DD&A increased 10.1% from the year-earlier level to $5.35 per barrel, primarily due to higher energy costs. Total refined product sales during the quarter averaged 578 MBbl/d, down 6.2% year-over-year. Average price realized on product sales increased 15.5% year-over-year to $82.26 per barrel. Average cost per barrel was also up 24.3% from the fourth quarter of 2008 to $78.76 per barrel.
Capital Expenditure & Balance Sheet
Tesoro’s total capital spending during 2009 was $542 million, in line with the company’s guidance. The company informed that it expects capital spending for 2010 to be around $600 million. As of December 31, 2009, Tesoro had cash on hand of $413 million and long-term debt of approximately $1.8 billion, representing a debt-to-capitalization ratio of 37.4%.
Dividend Suspended
Tesoro announced the suspension of its quarterly dividend in the foreseeable future in an effort to preserve cash and keep a healthy balance sheet. Late last year, the company declared a 50% reduction in its quarterly dividend to 5 cents per share (20 cents per share annualized).
Outlook
Given that the overall environment for refining margins is likely to remain poor; we are bearish on oil refiners like Tesoro. The sharply lower refinery utilization (at just 78.5% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.
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.
As a result, estimates for the current quarter (first quarter of 2010) have been trending down, with the quarterly Zacks Consensus Estimate dipping by 13 cents in the past one month. Overall, 5 out of the 10 analysts covering the stock pulled back on first quarter projections during that time, while there were no upward revisions.
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