This is a summary of the fourth quarter fiscal 2008 earnings call as presented by Tesoro (TSO) Corp on February 2009
Management
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Chairman, President and Chief Executive Officer: Bruce A. Smith
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Executive Vice President and Chief Operating Officer: Everett Lewis
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Senior Vice President, External Affairs and Chief Economist: Lynn D. Westfall
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Executive Vice President and Chief Financial Officer: Gregory A. Wright
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Executive Vice President Strategy and Corporate Development: William J. Finnerty
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Director, Investor Relations: Scott Phipps
Key Investors Issues
- Tesoro announced approved a regular quarterly cash dividend of 10 cents per share.
- Net earnings were 70 cents per diluted share.
- Operating income of $204 million was $196 million higher than the $8 million of segment operating income in the fourth quarter of 2007.
Full Year Highlights
- Earnings were $278 million, or $2.00 per diluted share compared to $566 million, or $4.06 per diluted share for 2007.
- Operating income was $471 million, compared to operating income of $967 million in 2007.
- This was because of lower per barrel refining margins and higher per barrel manufacturing costs.
Fourth Quarter Highlights
The early economic events in California negatively impacted operating cash flow in 2007.
- And since the firm was in the final stages of completing the $600 million Golden Eagle coker project, its monthly free cash generation turned negative also.
- In January, the firm began making adjustments to position the company to reverse the impact of the negative cash trend.
- Early actions overwhelmingly position it to withstand the financial turmoil that occurred later in the year.
The firm set specific goals to generate cash by slicing inventory and captured some of the highest value for that inventory.
- It also cut costs in capital as the entire organization is even more sensitized to cash.
- The combination of these actions enabled to the firm to repay over $600 million of revolving borrowings, which ensured that we had full availability under our working capital facility for the issuance of letters of credit.
- And as the firm enters 2009 therefore, it has very strong balance sheet.
Even though the Tesoro Index was down by approximately 66 cents a barrel versus the index in the fourth quarter of 2007, the gross margin actually improved by approximately $4 a barrel.
- The increase is due to a greater percentage of heavy crude volumes and heavy crudes were trading at historically wide differentials.
- Quarter-to-quarter the firm made processing adjustments that yielded more valuable distillates.
- And finally, the wholesale and retail marketing margins were stronger.
In total, Tesco captured a 150% of the Tesoro Index versus 93% in the quarter in 2007.
- Activities to improve performance in Hawaii and California had positive quarter-on-quarter variances.
- In a rising crude environment, the firm has built cash in Hawaii, but earnings were negatively impacted. And, the inverse is also true.
- The firm increased its ability to process some heavier crudes and upgraded the electrical system to make the refinery more reliable. Over the years, the refinery has had electrical problems that have caused unscheduled downtime.
Versus a year ago, heavy crude runs in California were up 2% and the yield of distillate of diesel and jet increased by 6% versus a year ago, thereby taking advantage of the $12 per barrel uplift over gasoline.
- This plan includes non-capital improvements in crude cost, transportation and distribution cost, yield structure and optimization.
- Cost reductions are expected as a result of the focus on energy and maintenance processes.
- Additionally, the full year benefit from our 2008 income projects, projects, such as the delayed coker at Golden Eagle will be received.
Tesoro aligned future capital spending plans to better match the lower cash flow expected from a softer market.
- The result is that the capital expenditure program was reduced in total and now favor small, quick pay back income projects instead of large multi-year projects.
- To make this adjustment, the firm had to identify projects that have an average cost of 2 to $3 million and meet high return criteria.
- In total, Tesoro now has over 300 projects which provide leverage that can generate near term additional earnings growth. And projects can be taken off the shelf when they become too costly.
