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Tesoro ‘Very Confident’ of Retail Plan Progress

ARCO investment, improvements drive marketing portfolio success

SAN ANTONIO -- Tesoro Corp. is advancing with its new retail strategy, and Greg Goff, chairman and CEO, said during the quarterly and full-year earnings call on Feb. 2 that he is “very confident” the company is “moving ahead well” with its implementation.

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Goff said during the company’s Analyst & Investor Day in December that Tesoro will aim to nearly double the EBITDA of its retail and gasoline-marketing business to more than $1 billion in the next three years through convenience-store improvements and acquisitions.

With a base of about 2,300 dealer retail sites, Tesoro aims to add another 350 retail locations by 2018 and 550 by 2020, creating more than 42,000 barrels per day of branded-fuel volume growth.

At the end of 2015, Tesoro had a total of 2,397 stations--1,805 jobber and dealer operated, 592 company and multi-site operated (MSO). This compares to a total of 2,267 stations at the end of 2014--1,683 jobber and dealer operated, 584 company and MSO operated.

The strategy will include a three-year brand-building program to boost and improve the image and consumer experience of Tesoro's ARCO gasoline brand, which it purchased from BP in 2013. Tesoro will invest $60 million to $75 million per year for branded growth and retention.

“The big lever for us is in our ARCO model, to go in and drive improvements in that business … across the board,” he said. “The acquisition of the ARCO brand was a significant enhancement to our marketing portfolio.”

The company is taking a broad, “holistic” approach about what is the most cost-effective way to get a good returns on investment, “so we will look at all different possibilities,” Goff said this week, but in response to an analyst question he emphasized that “spinning off the marketing business in our view isn't something that is attractive from a value creation standpoint. … That doesn't fit our business model.”

He added, “We truly believe that there is incredible value in our integrated business model. … Marketing is a critical part of how we are able to drive high utilization in our refineries.”

The company reported fiscal fourth-quarter 2015 net earnings of $54 million versus $145 million in the fourth quarter of last year. The marketing segment's operating income was $175 million, down from $261 million in the fourth quarter of last year, largely attributable to lower comparable marketing margins. Same-store fuel sales during the quarter were higher by 1% versus fourth quarter last year, driven by strong demand.

For the marketing segment, Tesoro reported quarterly EBITDA of $187 million and fuel margin of 12 cents per gallon, versus $273 million and 16 cents per gallon in 2014, and year-end EBITDA of a record $945 million and fuel margin of 14 cents per gallon, versus $595 million and 10 cents per gallon in 2014.

The company reported fuel sales of 2.2 billion gallons for the 2015 quarter and 8.61 billion gallons for the year versus 2.13 billion for the previous year’s quarter and 8.3 billion for the previous year.

During the period, Tesoro signed a strategic supply agreement with a key customer, Upland, Calif.-based Anabi Oil Corp., to sell fuel at 55 high-volume gas stations in the Las Vegas area that Anabi acquired from Rebel Oil in December.

San Antonio-based Tesoro is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates six refineries in the western United States with a combined capacity of 875,000 barrels per day and ownership in a logistics business that includes an interest in Tesoro Logistics LP and ownership of its general partner. Tesoro's retail-marketing system includes more than 2,300 gas stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands.

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