Retail Growth Drives Tesoro Earnings

Fuel volume rises 16% as gasoline prices drop

Steve Holtz, Editor in Chief, CSP Daily News

SAN ANTONIO -- A combination of overlapping factors has Tesoro Corp. celebrating its strongest quarterly report since before the recession began, showing growth in both refining and marketing.

The closing on the company's acquisition of almost 300 Shell-branded wholesale supply contracts, announced in late summer 2010, came just as gasoline prices began to fall, leading to an increase in gasoline volumes.

"Retail-fuel sales volumes were up 16% year over year, reflecting the addition of some 300 Shell stations in the Midcontinent earlier this year. Same-store fuel sales during the quarter were up nearly 1% relative to last year," said president and CEO Greg Goff on an earnings call yesterday.

"This is a significant improvement compared to what we saw in the second quarter, when California retail street prices peaked in May," he added. "Since then, street prices have fallen more than 40 cents per gallon, driving a rebound in volumes in the third quarter. Retail marketing margins were down during the quarter both sequentially and year over year."

Meanwhile, the purchase of about 290 retail stores from Supervalu Inc. and Thrifty Oil Co. will increase the San Antonio-based company's retail base by about 25%, further boosting gasoline volumes.

On September 8, 2011, Tesoro announced that it will add approximately 290 retail stations to its existing portfolio of nearly 1,200 stations through separate purchase and lease agreements with Supervalu and Thrifty Oil.

Tesoro agreed to acquire from Supervalu 50 Albertson's Fuel Express stations for $34 million, and plans to invest an incremental $5 million in branding capital. These stations are located in Washington, Oregon, California, Nevada, Idaho, Utah and Wyoming. Tesoro said it expects to complete the transaction early in 2012.

Separately, Tesoro agreed to lease from Thrifty Oil approximately 240 retail stations located primarily in southern California for an initial term of 10 years, and expects to invest $28 million in branding capital. Tesoro will take possession of the stations in a phased process, with approximately 190 stations online in 2012 and the balance of approximately 50 stations in 2014.

The majority of both the purchased and leased stations will be marketed under Tesoro's existing brands.

"These sites should add between 30,000 and 35,000 barrels per day of profitable and secure offtake for our refined products starting in 2012," Goff said. "Using year-to-date gasoline production and retail volumes, the addition of these stations increases our refining and marketing integration from about 35% to 47%. That's a significant improvement to one of our strategic priorities."

(Click here for previous coverage CSP Daily News coverage of the Supervalu and Thrifty Oil deals.)

Tesoro reported third-quarter 2011 net income of $345 million, or $2.39 per diluted share compared to net income of $56 million, or 39 cents per diluted share, for third-quarter 2010.

"This marks the highest quarterly earnings since the second quarter of 2007," said Goff.

For the quarter, the company recorded segment operating income of $622 million, compared to segment operating income of $201 million in third-quarter 2010, excluding one-time pre-tax expenses of $23 million associated with the Anacortes refinery outage. The year-over-year operating income improvement was driven by higher refinery utilization and capturing a significant crude cost advantage and improved margin environment.

Through its subsidiaries, independent refiner-marketer Tesoro operates seven refineries in the western United States with a combined capacity of approximately 665,000 barrels per day. Tesoro's retail-marketing system includes nearly 1,200 branded retail stations, of which over 375 are company operated under the Tesoro, Shell and USA Gasoline brands.

Steve Holtz, CSP/Winsight By Steve Holtz, Editor in Chief, CSP Daily News
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