Major independent refiner Tesoro
Corp., flanked by larger rivals that have shed assets to better compete in a
tough business environment for the sector, is betting that it can raise its
profits by holding on to its refineries.
Tesoro Chief Executive Greg Goff, 54, who joined Tesoro in May after leaving a
stint as senior vice president at ConocoPhillips , says that Tesoro plans to
forgo asset sales and instead spend 2011 concentrating on the relatively staid
strategy of increasing sales and trimming costs.
"Our focus is to go in and take the seven refineries we have today and run
them extremely well," Goff said in an interview at the company's
headquarters in San Antonio.
Despite the asset sales in the refining industry, Tesoro still has room to
squeeze more profitability from its existing refineries and would benefit
little from expanding outside its core market, Goff said.
Tesoro's stance marks a departure from the beleaguered industry's norm. In
2010, seeing their profits tumble due to shrinking U.S.
gasoline demand and increased fuel emission standards, Valero Energy Corp. and
Sunoco Inc., the first- and second-largest independent U.S. refiners, sold refineries and
other assets deemed uneconomic. Refiners expect U.S. gasoline demand to remain flat
or even shrink in years to come, leaving many companies to look for ways to cut
their production capacity.
Analysts criticized Tesoro after it unveiled its strategy at a Dec. 13
investors presentation at New York.
Rumors that Tesoro would sell one of its seven refineries had helped push
shares of the company, the third-largest refiner in the U.S. by
capacity, up past $17 a share before the presentation, a 35% increase since
Nov. 1.
After the presentation, many investment banks downgraded their ratings on Tesoro
stock. Deutsche Bank downgraded its rating on Tesoro shares to hold from buy,
and Howard Weil downgraded its rating on the stock to market perform from
market outperform. Most analysts target the stock at about $20 a share, saying
Tesoro now has to prove its strategy will add to its bottom line.
"The surprise sale announcement never came," Deutsche Bank analyst
Paul Sankey wrote in an investors note after the presentation. "Management
believes in the asset base and the organic cost- and capex-cutting approach. After
the targets, we are now in the dreaded 'show me' phase."
Tesoro's stock dropped by more than 4% in the days following the presentation
before starting to climb again, mainly tracking gains in the wider energy
market. The company's shares closed Wednesday at $18.68.
During the recent economic crisis, Tesoro's West Coast refineries were to some
extent victims of geography--half of the company's total 665,000 barrel-a-day
capacity rests in two refineries in California,
a state tied for the second-highest unemployment rate in the U.S. and
possessing the strictest climate laws in the country.
But those same refineries are well placed to buy more of the less
expensive--and more difficult to process--crude oil starting to come out of Russia,
Alaska, Asia and South
America, Goff said. The same refineries could also take greater
advantage of the growing fuel markets in China,
Mexico and South
America, Goff said.
Tesoro also hopes to become a bigger presence in the retail fuel market. Building
off its agreement with Shell Oil that added 400 Shell gas stations in the upper
Midwest to Tesoro's long-term customer base,
Tesoro hopes to supply 1,200 gas stations in 2011. It now supplies more than
880. Shell Oil is a unit of Royal Dutch Shell PLC .
"Our intent is to go out and grow in those areas, actively go out and try
to sign up people to become customers," Goff said.
Tesoro estimates those initiatives, plus others such as charging more for the
fuel oil its Hawaiian refinery supplies to Hawaiian Electric Co., would help it
boost its 2011 net earnings by up to $265 million.
As for asset sales, Tesoro said it will bundle some of its pipelines, terminals
and logistics businesses into a master limited partnership--an entity that pays
no corporate taxes and distributes profits to unit holders every quarter--and
take the new entity public. Tesoro expects to raise $200 million from the sale
and said it could use some of the money to pay down its debt, which was $1.8
billion in the third quarter of 2010.
Although the strategy underwhelmed many analysts, others believe it can work,
as long as the U.S.
economy stays stable.
"They just need to execute," Morningstar equities analyst Allen Good
said. "At the same time, any deterioration in the macro-environment could
wipe out all their self-help initiatives."