Tesoro: Refiner a Buy on Two Big Positives
Tesoro recently reported its quarterly results in which it managed to beat the revenue but missed the earnings estimates. However, despite the mixed results, there are several catalysts at work that could give a boost to the company's shares in the near future.
Tesoro is eyeing considerable improvements in its output as well as its margins. With impressive growth prospects, a PEG ratio of just 0.45, which is the lowest in the industry, and a price-to-sales ratio of just 0.2, the company looks seriously undervalued. Therefore, I believe that Tesoro could be a healthy addition to your portfolio.
In its quarterly results announced earlier this month, Tesoro reported a 77.4% year-over-year drop in adjusted earnings to 44 cents per share, missing analysts' estimates by 5 cents per share. The massive decline was due to the 43% increase in operating expenses and a significant reduction in refining margins.
However, Tesoro's throughput increased by an impressive 57% year-over-year to 863,000 barrels per day. Earlier in June, Tesoro acquired BP's
Meanwhile, Tesoro's retail segment delivered a better performance with 124% increase in fuel sales (also a result of the acquisition) and a 6% increase in merchandise sales from the same quarter last year.
With this output increase and a better performance from retail segment, Tesoro ended the quarter with a solid 42% year-over-year increase in revenues to $11.24 billion, zooming past the market's consensus estimate of $9.45 billion.
Tesoro is a company in transition towards becoming a bigger, more efficient organization. For a refiner, this would translate into three primary objectives; an increase in output, better utilization and improvement in margins. Based on the results discussed earlier, Tesoro has clearly delivered a strong performance in terms of output and utilization. This was the first of the two big positives from its earnings release. On the other hand, the weakness in refining margins has led to the significant drop in earnings.
So what is Tesoro's plan for the future? It has increased its capacity after the massive acquisition, but how is it going to improve its margins? This brings us to the second of the two big positives: Tesoro looks poised to significantly increase its earnings in the coming years.