What Made Joe Terranova Like This Refinery Company

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

Joe Terranova, chief market strategist for Virtus, recently said that amidst the current ongoing tension in the Middle East and with the strong movement in crude oil prices, he prefers refinery stocks--especially Tesoro (NYSE: TSO).  This news made me have a look at Tesoro’s stock performance, and I was very impressed with its growth of ~49% in just the last five months.  However, Tesoro is not the only company with good share price gains; its other two competitors have also shown decent growth.  Valero has shown an increase of ~31% and HollyFrontier has grown by around 25%.

Let’s have a look at its peers:

Company Name

Qtrly Rev Growth (yoy)

Gross Margin (Last 12 Months)

Tesoro Corporation

8%

6%

HollyFrontier Corporation (NYSE: HFC)

1%

15%

Valero Energy Corporation (NYSE: VLO)

3%

4%

Valero has been one of the top picks by various hedge fund managers. Recently, billionaire Stanley Druckenmiller has also increased his investment in the company.  It is working towards increasing its Port Arthur plant’s production capacity to 95,000 bpd from 85,000 bpd by the end of this year. Although the company recently faced an unplanned shutdown of this plant, after 10 days the company again started production at its normal rates. Also, it is expanding capacity in its Louisiana refinery, which is expected to be fully operational by mid-2013. With these expansion plans, Valero will continue to be the largest US refinery company.

On the other hand, HollyFrontier is also looking promising, although it didn’t see good revenue growth against its other two peers; however, it has a higher margin of 15% against the industry average of 11%. One of the main drivers of its high margin is the locations of its refineries. It has plants in Rocky Mountain and Plain states as opposed to the Gulf Coast, which provides it the extra cost advantage.  It also has a good balance sheet, with a debt/equity ratio of ~0.21 and a current ratio of 2.23. Another point that makes this stock more favorable is its high dividend yield of 5.6% in last year.

As for Tesoro, the company has some very good deals that would help it on to the higher growth path. Tesoro announced that it will acquire BP's Carson Refinery for ~$2.5 billion in Aug. 2012. However, the company faced some resistance from Consumer Watchdog, which asked the government to block this deal.  But it is expected that this deal would be finalized in 2013. This addition would help the company reduce Chevron’s lead in production capacity in California. With this deal, Tesoro is expected to save $250 million annually.

Apart from the deal, there are various organic growth avenues, which should benefit the company in the future. Tesoro recently completed expansion plans of its Mandan refinery; with this expansion, the total production has reached 68,000 barrels. Looking at the growing demand of diesel, I think the company has taken a very wise decision.  Additionally, the company recently started sending crude oil from Bakken to its Anacortes refinery; this would also help it to improve its revenue in the future.

Lastly, the company also has very good balance sheet the current cash available after 3Q 2012 is ~$1.37 billion. Furthermore, its cash available improved after the company recently sold its Anacortes Rail facility to Tesoro Logistics, which helped it get ~$180 million. Overall, I think this stock provides a very good opportunity for am investment looking at its strong growth prospects and solid balance sheet.  I would recommend buying this stock for long term growth.


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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