Tesoro's New Retail Roster Raises Fuel Volumes

FTC clears Hawaii sale; company closes BP SoCal deal; introduces Exxon, Mobil brands

Greg Lindenberg, Editor, CSP

SAN ANTONIO -- Tesoro Corp. has a busy June. It closed the acquisition of BP's fully integrated southern California refining, marketing and logistics business, including the Carson refinery and ARCO retail sites; announced that it had secured the rights from Exxon Mobil to use those brands at stations in parts of California and Washington and all of Oregon and Nevada, as well as Minnesota and parts of North Dakota and South Dakota; and signed an agreement to sell Tesoro Hawaii, which operates a refinery and retail outlets, to Par Petroleum.

Tesoro reported second-quarter 2013 net income from continuing operations of $238 million, compared to net income of $363 million for second-quarter 2012.

"Our solid second quarter results reflect a strong operating performance and continued execution of our strategic plan," said Greg Goff, president and CEO. "Despite significant turnaround activity, we reported refinery utilization of 93%; closed the transformational acquisition of BP's Southern California refining, marketing and logistics business; announced the sale of our Hawaii business; made significant progress on our high-return capital program; announced a strategically important branding agreement with ExxonMobil and developed the next phase of our West Coast crude oil supply strategy with the formation of the Tesoro-Savage joint venture."

For the second quarter, the company recorded segment operating income of $421 million, compared to segment operating income of $682 million in second-quarter 2012.

Retail fuel sales volumes were up more than 60% year-over-year driven by the addition of 835 dealer-operated ARCO retail stations on June 1, 2013, and the addition of 174 retail stations from Thrifty Oil Co. in the second and third quarters of last year. Same-store fuel sales during the quarter were higher by about 3%.

"Retail marketing margins were down about 16 cents per gallon relative to the same period last year," Goff said on the company's earnings conference call.

Tesoro executives spent much of the call discussing how several major retail deal affected the company's results.

On June 1, 2013, Tesoro closed the acquisition of BP's fully integrated Southern California refining, marketing and logistics business, including the Carson refinery and associated assets and the ARCO retail sites, for $1.075 billion.

On June 17, 2013, Tesoro announced that it had signed an agreement with a wholly owned subsidiary of Par Petroleum Corp. to sell all of its interest in Tesoro Hawaii LLC, which operates the Kapolei refinery, 31 gas stations and associated logistical assets, for $75 million. As part of the agreement, Par Petroleum's subsidiary intends to operate the assets as an integrated refining, logistics and retail system, keeping the stations branded Tesoro.

The sales price also included the market value of net working capital, which is expected to be approximately $225 million to $275 million, as well as an earnout arrangement payable over three years up to $40 million based on consolidated gross margins.

Tesoro has already received Federal Trade Commission (FTC) clearance for the sale of Tesoro Hawaii to Par Petroleum, the company said in announcing its second-quarter 2013 financial results on Aug. 1.

Tesoro expects to close the sale in September, Goff said on the call.

Based in Honolulu, Tesoro Hawaii is an integrated refined productions business, which includes a refinery, five refined products terminals, pipelines, mooring terminal and other associated logistics assets. In addition, Tesoro Hawaii owns 31 retail outlets located across the islands of Oahu, Maui and Hawaii.

Par Petroleum, Houston, manages and maintains interests in a variety of energy-related assets.

On June 27, 2013, Tesoro announced that it had secured the rights from Exxon Mobil to use the Exxon and Mobil brands at retail stations in northern California, Oregon, western Washington and Nevada, marketing areas strategically aligned with the company's West Coast operations. Tesoro also secured the rights to use the Exxon and Mobil brands throughout Minnesota, central-eastern North Dakota and northeastern South Dakota, marketing areas anchored by the company's refinery in Mandan, N.D. Through this arrangement and by the end of 2013, Tesoro intends to assume branded-wholesale supply contracts for 54 Exxon- or Mobil-branded retail stations in Minnesota.

Introducing the Exxon and Mobil brands into the company's multi-branded retail network provides the capability to drive additional retail fuel sales volumes, further integrating Tesoro's refining and marketing businesses, supporting sustainably higher refinery utilization, it said.

"[One] thing that we've been very focused on as a result of the business model that we have is to be highly integrated," said Goff in response to an analyst. "So what we have done over the last two to three years is really focus on creating a very integrated refining, marketing and logistics business, which allows us to then place primarily the gasoline through channels of trade that support ratability and profitability in that. ... [One example is] the recent acquisition of Carson. It's 100% integrated, so that further strengthened our position."

San Antonio-based Tesoro is an independent refiner and marketer of petroleum products. Through its subsidiaries, it operates six refineries in the western United States with a combined capacity of more than 845,000 barrels per day. Tesoro's retail marketing system includes more than 2,200 stations under the Tesoro, Shell, ARCO and USA Gasoline brands, of which more than 570 are company operated.