The Best Refiner for Growth

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tesoro (NYSE: TSO) is one of the largest independent refiners of petroleum products in the United States, and has done very well for its shareholders over the past year or so, rising over 140% since this time in 2012.  For a while there, I thought that the stock was getting too expensive, but now I’m not so sure.  What’s more, over the past few weeks, Tesoro has pulled back considerably from its high of just under $60, and may now be worthy of serious consideration.

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About Tesoro

Tesoro makes over 90% of its money from its refining operations, with the remainder coming from its retail business.  Tesoro refines crude oil at its seven refineries, which have a combined refining capacity of 675,000 barrels per day.  The end products of the company’s refining operations are gasoline (47.5%), jet fuel (13.6%), diesel (21.6%), and other petroleum products (18.2%). 

On the retail side of things, Tesoro sells gasoline and diesel fuel through its network of over 1,300 retail stations, mostly in the western United States.  In 2012, Tesoro sold over 1.7 billion gallons of fuel, 14% more than the year before.

Growth: Past and Future

Tesoro has grown tremendously over the past 15 years or so as a result of a series of acquisitions.  As a result, Tesoro’s refining capacity has grown from just 72,000 barrels per day in 1998 to over 675,000 today.

Just last year, Tesoro announced that it would be purchasing BP’s (NYSE: BP) Southern California refining and marketing business for $2.5 billion, including BP’s Carson refinery, which has a capacity of 266,000 barrels per day.  This deal should be great for both companies, as it will allow Tesoro to integrate BP’s refinery with its own system, therefore improving efficiency and saving money, and it will allow BP to divest some of its non-core assets and allow the company to focus on more pressing matters.  I like BP as an investment as well, and have written about its merits as an investment recently.

Once the BP deal closes (should happen in the second half of 2013), it still needs to gain antitrust approval, and once it does so shares should experience a nice lift.  This deal will give Tesoro one quarter of the entire processing capacity of California (hence the antitrust investigations), and a total production capacity of over 900,000 barrels per day.  I think even after this deal closes that Tesoro will continue to pursue acquisitions to increase the company’s footprint.


Even after all of the gains of the past year, Tesoro still trades at a very low valuation of just 8.7 times forward earnings, which looks even better considering the company’s excellent balance sheet, which has more cash than debt on it.  Tesoro is projected to earn $5.83 per share this year, and $6.26 next year, or forward earnings growth of 7.4%, which I think is conservative, especially if the BP deal goes through.

For comparison, the world’s largest independent refiner, Valero (NYSE: VLO) trades at just 7.2 times forward earnings, however is expected to have shakier earnings growth over the next few years.  Earnings are expected to drop this year, rise slightly next year, and be flat through 2015.  Not only does Valero not expand and grow as aggressively as Tesoro, the company carries much more debt, with about $6.4 billion in long-term obligations and just $1.7 billion in cash.


Not only is Tesoro inexpensive right now, but the company also has a better balance sheet and better growth potential than its peers.  Right now the market is pricing in a small chance that the BP deal won’t be approved, and once the deal gets antitrust approval, you may no longer be able to buy Tesoro at this kind of a discount.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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