Tesoro Carries Aggressive Growth Strategy Into 2017

SAN ANTONIO — Tesoro Corp. is making headway in its push to improve operating income, while also significantly growing its footprint.

"We made excellent progress in 2016 executing our growth strategy and delivering improvements in efficiency and productivity," Gregory Goff, chairman, president and CEO of Tesoro, reported during the company's earnings call Tuesday morning.

The progress he's referring to included delivering annual improvements to operating income, and making strategic acquisitions that position Tesoro for future growth, he explained.  

In 2016, the company committed to delivering $400 million to $500 million of annual improvements to its operating income. For full-year 2016, Tesoro ​estimates that it delivered approximately $420 million of annual improvements to operating income.

Estimated refining and marketing improvements were at the company's upper end of the expected range, according to Goff. However, estimated logistics improvements came in below Tesoro's expectations, primarily driven by weak commodity pricing.

According to Goff, 2016 was another strong year for Tesoro's marketing segment in regards to operating performance and volume growth. "We continue to successfully execute our strategy of optimizing the placement of our refined products through the most valuable channels," the chief executive stated. 

Tesoro's same-store sales increased by roughly 1 percent last year. In addition, its branded-station count grew by 4 percent, or 95 locations, year over year to reach a total of 2,492 stations.

"We expect to see continued favorable market fundamentals in 2017, driven by a strong economy and growth in consumer demand in the regions in which we operate," Goff said.

"We remain excited about the organic growth prospects in our marketing business as we continue to implement site improvements, which drive higher fuel volumes and a better customer experience, and expand our network of stations by leveraging our extensive brand portfolio," he continued.

In addition to organic growth, the company is expanding its footprint through acquisition activity. Tesoro and Western Refining Inc. signed a definitive merger agreement on Nov. 17 — an approximately $4.1-billion move that will make Tesoro a 3,000-plus station operation, as CSNews Online previously reported.

"The acquisition is expected to create a premier and highly integrated geographically diversified refining, marketing and logistics company, and provide a strong platform for earnings growth and cash flow generation," said Goff. 

Under the merger, Tesoro is committed to delivering $350 million to $425 million in annual synergies from operational improvements, value-chain optimization and corporate initiatives, with a run rate to achieve by the end of the second year. The deal is on pace to close in the first half of 2017.

"We are confident in our ability to achieve these targets given our solid track record of integrating operations and delivering results," the CEO said. "Integration planning is well underway and a planning team with representatives from both companies was established in December to ensure an effective and efficient transition."

BY THE NUMBERS

Overall, Tesoro reported fourth-quarter net earnings from continuing operations of $78 million, compared to $54 million a year ago. Consolidated net earnings were $101 million for the fourth quarter of 2016 compared to $83 million for the same period last year. EBITDA for the 2016 fourth quarter was $468 million compared to $388 million a year ago. 

Fourth-quarter operating income and EBITDA include a pretax benefit of $123 million in 2016 and a pretax loss of $276 million related to a lower cost or market inventory adjustment in 2015.

Looking at just Tesoro's marketing segment, operating income was $169 million; segment EBITDA was $192 million; and fuel margins were 11.4 cents per gallon in the fourth quarter of 2016. This compares year over year to an operating income of $175 million; segment EBITDA of $187 million; and fuel margins of 11.7 cents per gallon. 

The company reported that consumer demand remained strong, with year-over-year U.S. gasoline demand growth of approximately 1.6 percent, and California gasoline demand growth of approximately 2.1 percent through October. 

The company returned approximately $500 million to shareholders in the form of share repurchases and dividends, and also invested $418 million in high-return capital projects.

"We achieved these results despite a challenging market environment characterized by lower refining margins and significantly lower crude oil differentials vs. 2015," Goff explained.

2017 OUTLOOK

As for this year, Goff reiterated Tesoro's expectations that were made public in November. The company is committed to delivering an estimated $475 million to $575 million in annual improvements in operating income in 2017 through the execution of its growth and productivity plans. These estimates do not include the expected synergies from the pending Western Refining transaction, he noted.

The 2017 annual improvements in operating income include $45 million to $70 million of contribution from the marketing segment, according to Goff. 

"Looking ahead, we are excited about the opportunities that we see from an attractive refining market environment, strong consumer demand for gasoline, and numerous strategic initiatives underway to continue to improve operating income," he said. "Further, we are looking forward to additional value creation and synergy opportunities from our pending acquisition of Western Refining."

San Antonio-based Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of more than 895,000 barrels per day and ownership in a logistics business, which includes an interest in Tesoro Logistics LP and ownership of its general partner.

Tesoro's retail-marketing system includes more than 2,400 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline, Rebel and Tesoro brands.