Tesoro Corp.: Taming the West

April 2, 2008
Oil producer evaluates losses on West Coast refineries, addresses issues in Hawaii.

Big Oil seems to be in everyone's crosshairs these days. In one respect, it's no wonder seeing as gasoline prices are rapidly climbing toward $4 a gallon and everyone is looking for someone to blame. Earlier this week, the American Petroleum Institute (API) came to the industry's defense, saying that high crude costs -- not a conspiracy to keep supplies short -- is the primary driver of the prices being charged at the pump.

If that is the case, it might help to explain why oil refiners like Tesoro Corp. havent fared as well as gas prices might suggest. The IW 50 Best Manufacturer for 2007 reported a net loss of $40 million for its fourth quarter 2007, compared with a net income of $158 million for the same period a year before. The company says much of that can be attributed to problems with its West Coast refineries, which experienced higher operating expenses and poor marketing margins.

In addition, Tesoro's Hawaii refinery posted an $86 million pretax operating loss for the quarter, attributed to finished product prices that didn't reflect the rapidly rising cost and premiums paid for crude. An unplanned outage hurt results by an estimated $30 million, including $10 million in higher repairs and maintenance expenses. Taking Hawaii out of the equation, however, Tesoro actually achieved at- or near-record capture rates for the year due to capital improvement and optimization efforts, having made significant changes in crude purchasing and product sales at all of its refineries.

Lower benchmark margins in the Western United States overwhelmed many of the company's improvements and account for most of the quarter-to-quarter change, according to Bruce Smith, Tesoro's chairman, president and CEO. He also said plans are already in place to address the issues in Hawaii.

Tesoro Corp.
At A Glance

Tesoro Corp.
San Antonio, Texas
Primary Industry: Petroleum & Coal Products
Number of Employees: 3,950
2006 In Review
Revenue: $21.9 billion
Profit Margin: 4.42%
Sales Turnover: 3.07
Inventory Turnover: 17.88
Revenue Growth: 9.19%
Return On Assets: 15.72%
Return On Equity: 42.45%

"In Hawaii, the disappointing financial results are due to a combination of factors and the company has developed an action plan to address the myriad issues there," Smith said. "Improved reliability, changes to our crude slate ... and a greater focus on achieving better value for commercial products marketed in Hawaii are among the key initiatives we have undertaken."

Another key initiative recently involved shaking up the structure of Tesoro's management team. In a somewhat unique role reversal, Tesoro announced on March 19 that COO Bill Finnerty and executive vice president of strategy and asset management Everett Lewis had switched roles. Finnerty joined Tesoro in 2003 and became executive vice president and COO in 2006. Lewis joined Tesoro in 1999 as senior vice president of strategic projects and has 38 years of refining experience.

Tesoro's Chuck Flagg didn't trade places with anyone, but he was promoted to senior vice president of system optimization. Flagg, who joined the company in 2005 as senior vice president of supply and optimization, has 33 years of experience in refining including several positions with Texaco and Shell Oil.

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