29.10.2008 20:36:00

Tesoro Corporation Announces Third Quarter Results

Tesoro Corporation (NYSE:TSO) today reported third quarter 2008 net income of $259 million, or $1.86 per share. Quarterly results include a $0.29 per share after-tax gain associated with LIFO accounting and a charge of $0.06 per share after-tax for the write down and other expenses, associated with the previously announced closing of certain retail sites. Net income for the third quarter of 2007 was $47 million, or $0.34 per share.

For the three quarters ended September 30, 2008, net income was $181 million, or $1.30 per share, versus $606 million, or $4.35 per share a year ago when the company had unusually high refining margins due to significant industry unplanned downtime during the first half of the year.

Gross margins of $16.69 a barrel (bbl) in the quarter showed significant improvement versus the third quarter of 2007 and second quarter of 2008, by 85% and 65%, respectively, due to the Company’s profit improvement initiatives and the benefit of declining crude price.

"While benchmark crack spreads were lower than a quarter ago and flat versus a year ago, we realized record capture rates in almost every region and improved on our internal benchmarks for crude purchasing and product pricing versus the prior quarter. This quarter’s performance highlights our commitment to delivering on our Company’s stated goal of lowering crude costs and increasing product netbacks,” said Bruce A. Smith, Tesoro’s Chairman, President and CEO.

Operating income also rose due to the significant improvement in commercial and retail marketing margins, which are not accounted for in the spot crackspreads. Our retail and commercial marketing margin was $4.77/bbl versus $2.65/bbl a year ago. Retail segment income totaled $34 million due to improved fuel margins along with increased volumes associated with the purchase of the Shell and USA Brand retail assets. Finally, margins for bottom-of-the-barrel products strengthened as benchmark fuel oil prices on the West Coast traded at a $7/bbl discount to ANS versus $16/bbl a year ago.

Also, the third quarter benefited from the first full quarter of operating the delayed coker at Golden Eagle which allowed us to run incremental volumes of less expensive crude. In comparison to the fluid coker, the delayed coker provided an incremental $37 million in EBITDA during the third quarter and is expected to reduce emission levels. Accordingly, we believe it is realistic that the Company will achieve its previously stated goal of generating $100 million in incremental annual EBITDA as a result of this investment.

The Company’s third quarter 2008 throughput was 32,000 barrels per day lower than the third quarter 2007 as we optimized production to meet lower product demand. Going forward, we expect to continue to balance the supply of both production and inventories around consumer demand and profitability of the last barrel produced.

Direct manufacturing costs before depreciation and amortization were $300 million for the third quarter of 2008 versus $247 million a year ago but were in line with costs reported in the second quarter 2008. The year over year increase was primarily due to changes in purchased energy.

Third quarter capital expenditures including turnaround spending amounted to $137 million bringing the year-to-date total to $524 million; accordingly, expected total 2008 capital expenditures should be less than $775 million. At the end of the third quarter, the Company had no borrowings under its revolving credit facility and had a net debt to net capitalization of 30% which is the lowest ratio since the fourth quarter of 2006, before the Los Angeles refinery acquisition.

"We recognize that the highs and lows of margins don’t continue indefinitely. And while some people talk about refining’s Golden Age or the Dark Age, the constant balancing of supply and demand within the marketplace ultimately pushes margins to the middle of the commodity market. The sudden rise in crude prices caused us to make early adjustments to our goal of reducing both operating and crude costs, and these improvements were reflected in this quarter’s record capture rates. Another early goal was to internally fund our operations and to maintain a strong balance sheet by repaying all of our outstanding borrowings under our revolver. In September, we borrowed for one day, domestic crude oil settlement day, and we ended the month with $184 million in cash. Today, the Company is positioned to generate earnings and meet the challenges of slowing global economies,” said Smith.

Board Declares Quarterly Dividend

Tesoro announced today that its Board of Directors has approved a regular quarterly cash dividend of $0.10 per share. The dividend is payable December 15th, 2008 to shareholders of record as of December 1st, 2008.

Public Invited to Listen to Analyst Conference Call

At 7:30 a.m., CDT, Thursday, October 30th, 2008 Tesoro will broadcast, live, its conference call with analysts regarding third quarter 2008 results and other business matters. Interested parties may listen to the live conference call over the Internet by logging on to http://www.tsocorp.com, or via phone by dialing 888-241-0558 (international dial-in: 402-220-1755).

Tesoro Corporation, a Fortune 150 company, is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of approximately 660,000 barrels per day. Tesoro's retail-marketing system includes over 880 branded retail stations, of which over 390 are company operated under the Tesoro®, Shell®, Mirastar® and USA Gasoline™ brands.

This earnings release contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the market environment, and our expectations about capital reductions and our margin capture. For more information concerning factors that could affect these statements see our annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, after the date hereof."

TESORO CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(In millions except per share amounts)
           
Three Months Ended Nine Months Ended
September 30, September 30,
2008   2007   2008   2007  
Revenues $ 8,698 $ 5,902 $ 23,983 $ 15,382
Costs and Expenses:
Costs of sales and operating expenses (a) 8,065 5,651 23,159 13,909
Selling, general and administrative expenses 68 47 178 189
Depreciation and amortization 99 97 288 255
Loss on asset disposals and impairments 14   8   37   13  

 

 

 

 

Operating Income 452 99 321 1,016
Interest and Financing Costs (30 ) (28 ) (91 ) (75 )
Interest Income 2 4 5 29
Other Income (b) 1   -   50   -  

 

 

 

Earnings Before Income Taxes 425 75 285 970
Income Tax Provision 166   28   104   364  
Net Earnings $ 259   $ 47   $ 181   $ 606  
Net Earnings Per Share:
Basic $ 1.89 $ 0.35 $ 1.33 $ 4.47
Diluted $ 1.86 $ 0.34 $ 1.30 $ 4.35
Weighted Average Common Shares:
Basic 137.1 135.9 136.6 135.6
Diluted 139.4 139.6 139.3 139.4
   
Note: Our results of operations for the nine months ended September 30, 2007 include our Los Angeles refinery assets and retail stations since acquired in May 2007.
 
(a) During 2008, reductions in inventory quantities resulted in liquidations of applicable LIFO inventory quantities carried at lower costs in prior years. The LIFO liquidations resulted in decreases of costs of sales of $68 million and $146 million for the three and nine months ended September 30, 2008, respectively.
 
(b) Other income for the three and nine months ended September 30, 2008 represents net refunds received from the Trans Alaska Pipeline System in connection with rulings by the Regulatory Commission of Alaska concerning our protest of intrastate pipeline rates set between 1997 and 2003.

TESORO CORPORATION
SELECTED OPERATING SEGMENT DATA
(Unaudited)
(In millions)
           
 
Three Months Ended Nine Months Ended
September 30, September 30,
2008   2007   2008   2007  
Operating Income (Loss)
Refining $ 476 $ 132 $ 474 $ 1,179
Retail 34   4   (5 ) (7 )
Total Segment Operating Income 510 136 469 1,172
Corporate and Unallocated Costs (58 )

 

(37 ) (148 ) (156 )
Operating Income 452 99 321 1,016
Interest and Financing Costs (30 ) (28 ) (91 ) (75 )
Interest Income 2 4 5 29
Other Income (b) 1   -   50   -  
Earnings Before Income Taxes $ 425   $ 75   $ 285   $ 970  
 
Depreciation and Amortization
Refining $ 83 $ 86 $ 239 $ 227
Retail 10 8 32 19
Corporate 6   3   17   9  
Depreciation and Amortization $ 99   $ 97   $ 288   $ 255  

 

Capital Expenditures
Refining $ 119 $ 182 $ 407 $ 489
Retail 4 1 10 3
Corporate 7   12   24   32  
Capital Expenditures $ 130   $ 195   $ 441   $ 524  
  BALANCE SHEET DATA
(Unaudited)
(Dollars in millions)
   
September 30, December 31,
2008 2007
Cash and Cash Equivalents $ 184 $ 23
Total Assets $ 8,700 $ 8,128
Total Debt $ 1,542 $ 1,659
Total Stockholders' Equity $ 3,229 $ 3,052
Total Debt to Capitalization Ratio 32% 35%
 
Net Debt to Net Capitalization Ratio:
Total Debt $ 1,542 $ 1,659
Less: Cash and Cash Equivalents $ 184 $ 23
Net Debt (c) $ 1,358 $ 1,636
Total Stockholders' Equity $ 3,229 $ 3,052
Net Capitalization (c) $ 4,587 $ 4,688
Net Debt to Net Capitalization Ratio (c) 30% 35%
 
 

 

(c)

Net debt represents total debt less cash and cash equivalents. Net capitalization represents the total of net debt and total stockholders’ equity. The Company believes net debt to net capitalization is useful in measuring financial leverage as we have historically used cash to prepay outstanding notes. Net debt to net capitalization should not be considered as an alternative to debt to capitalization or any measure of financial leverage presented in accordance with accounting principles generally accepted in the United States of America. Net debt to net capitalization may not be comparable to similarly titled measures used by other companies.

 

TESORO CORPORATION
OPERATING DATA
(Unaudited)
           
 
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
REFINING SEGMENT
Total Refining Segment
Throughput (thousand barrels per day) (d)
Heavy crude 221 192 194 144
Light crude 364 431 380 407
Other feedstocks 37 31 35 29

Total Throughput

622 654 609 580
 
Yield (thousand barrels per day)
Gasoline and gasoline blendstocks 283 316 282 269
Jet fuel 82 88 80 76
Diesel fuel 158 137 144 127

Heavy oils, residual products, internally produced fuel and other

132 141 133 132

Total Yield

655 682 639 604
 
 
Gross refining margin ($/throughput bbl) (e) $ 16.69 $ 9.02 $ 11.21 $ 14.38

Manufacturing cost before depreciation and amortization ($/throughput bbl) (e)

$ 5.24 $ 4.10 $ 5.29 $ 4.18
 
Segment Operating Income ($ millions)
Gross refining margin (f) $ 955 $ 543 $ 1,869 $ 2,276
Expenses
Manufacturing costs (g) 300 247 883 660
Other operating expenses (g) 88 68 234 179
Selling, general and administrative 8 9 29 25
Depreciation and amortization (h) 83 86 239 227
Loss on asset disposals and impairments - 1 10 6

Segment Operating Income

$ 476 $ 132 $ 474 $ 1,179
 
Refined Product Sales (thousand barrels per day) (i)
Gasoline and gasoline blendstocks 327 347 330 308
Jet fuel 94 101 95 93
Diesel fuel 164 145 146 133
Heavy oils, residual products and other 97 98 98 95

Total Refined Product Sales

682 691 669 629
 
Refined Product Sales Margin ($/barrel) (i)
Average sales price $ 131.21 $ 88.68 $ 124.68 $ 85.81
Average costs of sales 117.83 80.65 114.43 72.99
Refined Product Sales Margin $ 13.38 $ 8.03 $ 10.25 $ 12.82
       
(d) In the 2007 fourth quarter, we redefined heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less. Previously, heavy crude oils were defined as crude oils with a gravity of 32 degrees or less. Heavy and light throughput volumes for the three and nine months ended September 30, 2007 have been adjusted to conform to the 2008 presentation.
 
(e)

In the 2007 fourth quarter, we revised the calculation of gross refining margin per throughput barrel to include the effect of inventory changes. Inventory changes are the result of selling a volume and mix of product that is different than actual volumes manufactured. The amounts for the three and nine months ended September 30, 2007 have been recalculated to conform to the 2008 presentation. Previously, gross refining margin per barrel was calculated based upon manufactured product volumes. Management uses gross refining margin per barrel to evaluate performance and compare profitability to other companies in the industry. Gross refining margin per barrel is calculated by dividing gross refining margin by total refining throughput and may not be calculated similarly by other companies. Gross refining margin is calculated as revenues less costs of feedstocks, purchased refined products, transportation and distribution. Management uses manufacturing costs per barrel to evaluate the efficiency of refinery operations. Manufacturing costs per barrel is calculated by dividing manufacturing costs by total refining throughput and may not be comparable to similarly titled measures used by other companies. Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered as alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States.

 
(f) Consolidated gross refining margin totals gross refining margin for each of our regions adjusted for other costs not directly attributable to a specific region. Other costs resulted in a $1 million decrease and a $7 million decrease for the three months ended September 30, 2008 and 2007, respectively, and a $3 million increase and a $19 million decrease for the nine months ended September 30, 2008 and 2007, respectively. Gross refining margin includes the effect of intersegment sales to the retail segment at prices which approximate market. Gross refining margin approximates total refining throughput times gross refining margin per barrel.
 
(g) Beginning in 2008, we reclassified certain environmental expenses from manufacturing expenses to other operating expenses. We have reclassified $1 million and $4 million for the three and nine months ended September 30, 2007, respectively, to conform to the 2008 presentation.
 
(h) Includes manufacturing depreciation and amortization per throughput barrel of approximately $1.39 and $1.35 for the three months ended September 30, 2008 and 2007, respectively, and $1.35 and $1.35 for the nine months ended September 30, 2008 and 2007, respectively.
 
(i) Sources of total refined product sales included refined products manufactured at the refineries and refined products purchased from third parties. Total refined product sales margin includes margins on sales of manufactured and purchased refined products and the effects of inventory changes.

TESORO CORPORATION
OPERATING DATA
(Unaudited)
               
 
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Refining By Region
California (Golden Eagle and Los Angeles) (j)(k)
Throughput (thousand barrels per day) (d)
Heavy crude 188 168 163 120
Light crude 66 83 77 67
Other feedstocks 19 21 21 16
Total Throughput 273 272 261 203
 
Yield (thousand barrels per day)
Gasoline and gasoline blendstocks 135 156 136 109
Jet fuel 19 18 19 9
Diesel fuel 83 61 70 49

Heavy oils, residual products, internally produced fuel and other

59 54 55 49
Total Yield 296 289 280 216
 
Gross refining margin (e) (in millions) $ 458 $ 277 $ 1,016 $ 1,000
Gross refining margin ($/throughput bbl) (e) $ 18.22 $ 11.07 $ 14.22 $ 18.03
Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 7.47 $ 6.12 $ 7.51 $ 6.99
 
Pacific Northwest (Alaska & Washington) (j)
Throughput (thousand barrels per day) (d)
Heavy crude 1 11 9 10
Light crude 148 169 148 165
Other feedstocks 13 5 9 9
Total Throughput 162 185 166 184
 
Yield (thousand barrels per day)
Gasoline and gasoline blendstocks 67 75 66 78
Jet fuel 35 37 32 33
Diesel fuel 32 31 32 33

Heavy oils, residual products, internally produced fuel and other

34 47 41 46
Total Yield 168 190 171 190
 
Gross refining margin (e) (in millions) $ 205 $ 86 $ 372 $ 623
Gross refining margin ($/throughput bbl) (e) $ 13.76 $ 5.01 $ 8.19 $ 12.43
Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 3.79 $ 2.84 $ 3.94 $ 2.80
 
Mid-Pacific (Hawaii)
Throughput (thousand barrels per day) (d)
Heavy crude 32 13 22 14
Light crude 40 68 48 70
Total Throughput 72 81 70 84
 
Yield (thousand barrels per day)
Gasoline and gasoline blendstocks 16 18 16 20
Jet fuel 18 23 19 24
Diesel fuel 11 14 11 15

Heavy oils, residual products, internally produced fuel and other

28 28 26 26
Total Yield 73 83 72 85
 
Gross refining margin (e) (in millions) $ 80 $ 2 $ 30 $ 86
Gross refining margin ($/throughput bbl) (e) $ 12.15 $ 0.32 $ 1.55 $ 3.74
Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 3.45 $ 2.12 $ 3.23 $ 2.03
       

 

(j) We experienced reduced throughput during scheduled turnarounds at the Golden Eagle refinery during the 2008 first and second quarters, the Washington refinery during the 2008 first quarter, the Los Angeles refinery during the 2007 second quarter and the Golden Eagle and Utah refineries during the 2007 first quarter.
 
(k) Volumes and margins for 2007 include the Los Angeles refinery since acquired in May 2007.

TESORO CORPORATION
OPERATING DATA
(Unaudited)
                     
 
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Mid-Continent (North Dakota & Utah) (j)
Throughput (thousand barrels per day) (d)
Light crude 110 111 107 105
Other feedstocks 5 5 5 4
Total Throughput 115 116 112 109
 
Yield (thousand barrels per day)
Gasoline and gasoline blendstocks 65 67 64 62
Jet fuel 10 10 10 10
Diesel fuel 32 31 31 30

Heavy oils, residual products, internally produced fuel and other

11 12 11 11
Total Yield 118 120 116 113
 
Gross refining margin (e) (in millions) $ 213 $ 185 $ 448 $ 586
Gross refining margin ($/throughput bbl) (e) $ 20.10 $ 17.41 $ 14.61 $ 19.64
Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 3.12 $ 2.81 $ 3.42 $ 2.98

TESORO CORPORATION
OPERATING DATA
(Unaudited)
             
 
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007 (l)
RETAIL SEGMENT
Number of Stations (end of period)
Company-operated 391 449 391 449
Branded jobber/dealer 492 453 492 453
Total Stations 883 902 883 902
 
Average Stations (during period)
Company-operated 414 451 432 333
Branded jobber/dealer 495 446 488 359
Total Average Retail Stations 909 897 920 692
 
Fuel Sales (millions of gallons)
Company-operated 258 311 815 555
Branded jobber/dealer 76 71 211 175
Total Fuel Sales 334 382 1,026 730
 
Fuel Margin ($/gallon) (m) $ 0.30 $ 0.16 $ 0.18 $ 0.15
Merchandise Sales ($ millions) $ 60 $ 62 $ 171 $ 146
Merchandise Margin ($ millions) $ 16 $ 17 $ 44 $ 38
Merchandise Margin % 27% 27% 26% 26%
 
Segment Operating Income (Loss) ($ millions)
Gross Margins
Fuel (n) $ 99 $ 61 $ 181 $ 110
Merchandise and other non-fuel margin 22 23 60 48
Total Gross Margins 121 84 241 158
Expenses
Operating expenses 56 61 170 122
Selling, general and administrative 7 4 19 17
Depreciation and amortization 10 8 32 19
Loss on asset disposals and impairments (o) 14 7 25 7
Segment Operating Income (Loss) $ 34 $ 4 $ (5) $ (7)
       
(l) The retail operating data for 2007 includes the Shell® and USA Gasoline™ stations since acquired in May 2007.
 
(m) Management uses fuel margin per gallon to compare profitability to other companies in the industry. Fuel margin per gallon is calculated by dividing fuel gross margin by fuel sales volume and may not be calculated similarly by other companies. Investors and analysts use fuel margin per gallon to help analyze and compare companies in the industry on the basis of operating performance. This financial measure should not be considered as an alternative to segment operating income and revenues or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States.
 
(n) Includes the effect of intersegment purchases from the refining segment at prices which approximate market.
 
(o) During the three months ended September 30, 2008, we closed 42 Mirastar retail stations resulting in impairment charges of $13 million. Retail operating income for the nine months ended September 30, 2008 also included impairment charges of $11 million related to other retail stations.

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