This summary is based on the first quarter fiscal 2008 earnings call conducted by Tesoro Corporation (TSO) on May 7, 2008.
Management:
Director of IR: Scott Phipps
VP and CFO: Otto C. Schwethelm
EVP and COO: Everett Lewis
Chairman, President and CEO: Bruce A. Smith
VP, Strategy and Long-Term Planning: G. Scott Spendlove
EVP and Chief Administrative Officer: Gregory A. Wright
Sr. VP, External Affairs and Chief Economist: Lynn Westfall
Sr. VP, Refining: Dan Porter
Key Investors Issues
- EPS were a loss of 60 cents a share compared to a profit of 84 cents a share last year.
- Net income was a loss of $82 million compared to a profit of $116 million a year ago.
- Revenue rose to $6.53 billion from $3.88 billion.
First Quarter Highlights
The company recorded a net loss of $82 million or 60 cents per share versus net income of $116 million or 84 cents per share for the first quarter of 2007.
These results included the pre-tax benefit of a $45 million settlement related to a dispute over the appropriate amount that the company had been paying for the Trans Alaska Pipeline System tariffs. This is a one-time payment associated with claims filed for the period 1997 through 2000.
- Unadjusted, year-over-year comparisons will not be valid because the company did not own Los Angeles in the first quarter of last year.
Refining reported an operating loss of $87 million versus a profit of $256 million for the first quarter of 2007.
This was primarily a result of gross refining margins which were $6.54, down over 50% from a year ago and reflective of benchmark crack spreads which were also down by half. Lower margins were caused by the failure of product prices to move in tandem with the increase in crude cost.
- On the West Coast, large inventory overhangs and slowing demand for transportation fuels kept margins down and bottom of the barrel products which include asphalt, fuel oil and petroleum coke which reflect approximately 18% to 20% of total production lagged high value petroleum products.
- Refining depreciation and amortization expense of $73 million was $11 million higher than a year ago due to the Los Angeles refining acquisition versus the fourth quarter of 2007 refining D&A was down $14 million. In 2006 when the company chose to build the delayed coking unit at Golden Eagle, the company accelerated the depreciation of the existing fluid coker. At that time the company anticipated that it would complete the project in the fourth quarter of 2007 and so it adjusted the depreciation schedule to match that completion date. Since the first quarter the company did not incur this expense, depreciation rate was lower.
Retail reported an operating loss of $28 million versus a loss of $1 million during the fourth quarter of 2007.
- Retail sales volumes were down 5% quarter-on-quarter totaling 349 million gallons versus 368 million gallons during the fourth quarter of 2007.
- Margins averaged 12 cents per gallon, down from 15 cents per gallon during the fourth quarter.
- Corporate and unallocated expenses were $43 million versus $57 million during the first quarter of 2007 as well as during the fourth quarter of 2007. The $14 million difference was primarily due to the decrease in stock-based compensation expense.
- Interest and financing costs were $27 million, higher than both the first quarter of 2007 and the fourth quarter of 2007. The main driver of this increase quarter-on quarter was due to borrowings on the revolver.
California cracks were at the low end of the band across the quarter, averaging $14 per barrel versus $30 per barrel during the first quarter of 2007.
- Northwest cracks averaged $13 a barrel versus $23 a barrel for the first quarter, last year.
- Group 3 crack averaged $10 per barrel versus $15 per barrel during the first quarter of 2007.
- Lower margins were a result of three main sources: the company had seasonally high finished product inventory, it had slowing domestic demand for finished products and product price lagged the rapid crude price increases. While gasoline margins were weak, distillate margins remained relatively strong.
- Export demand for distillates, specifically low sulfur diesel was the main reason that these differentials perform better. According to latest monthly Department of Energy data pad by diesel exports totaled over 3 million barrels for February which is another increase over January.
Throughput total excluding Los Angles refinery is 24,000 barrels a day, higher than last year.
This is mainly due to the fact that the company had higher turnaround activity last year when it had significant work being done at the Golden Eagle facility. Specifically, the Los Angeles refinery averaged 104,000 barrels a day which is well above original expectations for that facility. Throughput was reduced to Hawaii, Alaska and Anacortes in January in response to the lower margins. Throughput in Anacortes and Golden Eagle was impacted by additional turnaround activities at both facilities, particularly at the beginning of the new coker tie-ins at Golden Eagle which began at the very end of the first quarter.
