Tesoro Corp.: Prepared for Tough Times

Feb. 26, 2009
Planning ahead helps put oil refiner in a good position to survive a weakening market.

Oil companies continue to report relatively shaky earnings, as falling crude prices have made profits tumble. One of the most recent was Tesoro Corp., which said on Feb. 19 that its full-year earnings for 2008 had dropped by more than 50% from 2007. However, they also generated fourth quarter net earnings of $97 million -- a more than modest turnaround from the $40 million loss posted a year earlier.

The IW 50 Best Manufacturer for 2008 recorded earnings of $278 million ($2 per diluted share) in 2008 compared with $566 million ($4.06 per diluted share) in 2007. Operating income for the year also fell from $967 million to $471 million due to lower per barrel refining margins and higher per barrel manufacturing costs.

For the fourth quarter, however, Tesoro's segment operating income rose $196 million from just $8 million a year earlier. The substantial increase was attributed to higher gross margins as the company improved its capture of the available industry benchmark margins, especially in Hawaii and California, and improved results from its retail segment.

According to Bruce Smith, Tesoro's chairman, president and CEO, the actions the company has been taking since late in 2007 have positioned it to succeed even in this weak market environment.

Tesoro Corp.
At A Glance

Tesoro Corp.
San Antonio, Texas
Primary Industry: Petroleum & Coal Products
Number of Employees: 5,500
2007 In Review
Revenue: $21.9 billion
Profit Margin: 2.58%
Sales Turnover: 2.70
Inventory Turnover: 19.60
Revenue Growth: 21.05%
Return On Assets: 9.59%
Return On Equity: 22.62%
"While falling commodity prices did benefit our wholesale and retail marketing channels, the capital and non-capital initiatives we implemented beginning in early 2008 have enhanced our ability to deliver substantial and sustainable improvements in our capture of the available margin," said Smith.

Despite the lower industry benchmarks in the quarter, gross refining margin increased 51% to $12.47 per barrel from $8.28 per barrel a year ago. Margin realization also improved as a result of the Tesoro's efforts to increase crude flexibility and distillate production.

"While the strength in first quarter West Coast margins has been a pleasant surprise, we plan to continue to follow our 2009 business plan which is based on industry benchmark margins that are lower than 2008, and our expectation that we will realize continued improvement in margin capture," Smith added.

Tesoro later told Reuters that it expects total system throughput of its U.S. refinery system to range between 520,000 and 560,000 barrels per day (bpd) during the first quarter of 2009. In the Pacific Northwest, throughput was seen at 110,000 to 120,000 bpd, while 65,000 to 75,000 bpd was anticipated for its Mid-Pacific region. Mid-Continent refineries were seen running at 95,000 to 105,000 bpd while California was put at 250,000 to 260,000 bpd.

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