This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Tesoro Corp. (TSO) on January 31, 2008.
Management:
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Chairman, President and CEO: Bruce A. Smith
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VP, CFO: Otto C. Schwethelm
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EVP and COO: William J. Finnerty
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Sr. VP, External Affairs and Chief Economist: Lynn Westfall
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Sr. VP, Supply and Optimization: Dan Porter
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Manager, IR: Scott Phipps
Key Investors Issues
- The firm realised a loss of $40 million or 29 cents a share.
- Revenues were up 63% to $6.53 billion.
- The Board of Directors approved a regular quarterly cash dividend of 10 cents per share.
Full Year Highlights:
- The company reported net earnings of $566 million, or $4.06 per diluted share, versus earnings of $801 million, or $5.73 per share in 2006.
- The firm acquired and fully integrated the Los Angeles refinery and California retail assets and subsequently reduced debt to achieve a year-end debt-to-capitalization ratio of 35%.
Fourth Quarter Highlights
The firm realised a loss of $40 million or 29 cents a share compared to net income of $158 million, or $1.14 per share in the prior year as the refining segment recorded operating income of $9 million compared to $284 million in the same period last year.
- The $275 million reduction in operating income was driven primarily by the lower gross margin and higher manufacturing costs.
- Gross refining margin of $8.28 a barrel was down 35% or $4.50 a barrel versus the 2006, while refining manufacturing expenses of $5.22 or $1.34 a barrel higher than a year ago.
- Higher manufacturing costs were primarily a result of increased repairs and maintenance, as well as increased energy costs.
- Unplanned downtime at the Hawaii refinery lowered earnings by an estimated $30 million because of lost opportunity and additional expense.
Revenues increased by 62.5% from $4.02 billion in the prior year to $6.53 billion as as rising crude prices caused pump prices to increase although not enough to protect margins against economic worries.
- With weak demand, the industry then inflicted more pain as supply rose in California because refineries were operating at high throughput rates, which pushed inventories to five-year highs.
- The lag effect around Hawaii prices amounted to approximately $20 million and expenses at Golden Eagle included an additional accrual of $18 million for certain environmental remediation costs associated with a recent settlement.
- Included in the reported gross margin of $8.28 per barrel is a product inventory bill of $29 million, mainly associated with the business decision of building products ahead of the Golden Eagle turn around.
- Corporate general expenses were $49 million with the $15 million increase from the third quarter mainly due to employee related costs over half of which was the additional expense associated with stock-based compensation.
Total depreciation and amortization was $102 million, interest expense net of interest income was $16 million and the firm finished the year with total capital spending of $932 million.
- The Board of Directors approved a regular quarterly cash dividend of 10 cents per share
- In response to an oversupplied West Coast market, in early January the firm reduced throughput at several facilities, and since then there been other production changes.
- Looking ahead, the next milestone in the recovery of California margins will be the transition from winter to summer grade gasoline which should cause the industry to reduce its winter inventory position.
- Seasonal first quarter demand and reduced supply, due to lower industry production rates, turnarounds and unplanned outages will be critical to rebalancing the market.
Operational Highlights:
- Plans ran safely and reliably, expect for unplanned downtime on Hawaii’s reforming unit, which limited throughput rates to 74,000 barrels a day.
- Because of the turnarounds in Anacortes, Golden Eagle and Mandan in 2006, throughput on a same refinery basis in 2007 was up 34,000 barrels a day to 535,000 barrels a day, in spite of the Hawaii outage.
- Los Angeles throughput was 104,000 barrels a day bringing total throughput up to 639,000 barrels a day and programs are in place to move to a heavier and more sour slate of crudes and to increase clean product yields.
On the pricing side, the realized crude cost and product values was stronger relative to market than a year ago.
- Crude purchases were particularly advantage for Golden Eagle, Anacortes, and Salt Lake City.
- The Amoco work transfer and crude blending project completed at Golden Eagle in the latter part of 2007 continues to provide the opportunity to tailor crude diet and significantly reduce crude costs.
- In Anacortes, the start up of the Amine Unit August has allowed the firm to run more Canadian heavy crudes at significant discounts.
- In Salt Lake City, the firm entered into a new supply contract that should allow it to continue to realize these lower crude costs going forward.
For Mandan, also it also entered into a long-term supply contract with the mid-continent producer that should maintain a competitive advantage for raw materials into the refinery.
- The producer will build the pipeline from their fields into existing crude pipeline, which will enable the firm to supply 20% to 50% of Mandan''s crude requirements.
- Additional supplies were turned up for Alaska, Anacortes, and Golden Eagle during the quarter securing important feedstocks for these refineries.
- A natural gas shortage in Alaska forced the company to use clean products as plant fuel, which significantly reduced realized values on clean products.
- The start-up of Kenai''s DDU in the middle of 2007 positions the firm as the only producer of ultra low sulfur diesel in Alaska which has greatly improved product realizations year-over-year.
