Tesoro Carries Over Aggressive Growth Strategy Into Q2
SAN ANTONIO — Despite $40 million in setbacks due to the impact of severe weather, Tesoro Corp. reported solid results during the company's first-quarter 2017 earnings call, and continued progress on its planned growth initiatives, which are now ongoing in the second quarter.
“Moving into April, these events have passed and we see our business performing well and in line with our expectations for 2017,” Tesoro CEO Greg Goff remarked on the May 9 call.
The "expectations" he’s referring to include continued progress on the company’s planned growth initiatives, integration of its acquisitions, and the expected dropdown to Tesoro Logistics LP (TTLP), which is on track to deliver approximately $760 million of annual operating income and approximately $1 billion of annual EBITDA in 2017.
Tesoro recently updated its 13D ownership filing with the Securities and Exchange Commission for TLLP, indicting its intentions to work with the board of directors and management of TLLP to "consider, discuss and endeavor to negotiate a merger, consolidation or a combination of TLLP and Western Refining Logistics and consider, discuss, endeavor to negotiate changes to the capital structure of TLLP, including with respect to incentive distribution rights,” Goff detailed.
Tesoro remains committed to reaching its goal of $950 million of marketing segment operating income and $1 billion of segment EBITDA by 2018. According to Goff, Tesoro expects to achieve this goal primarily through organic growth, rebranding stations to enhance customer experience, and the potential for some small acquisitions of high-quality stations.
The company's efforts are focused around a target of delivering 350 new retail stations from its starting point of about 2,300 in 2015. The company has made “tremendous” progress toward this target and has already added 224 new stations since 2015, including 77 over the last 12 months, according to Goff.
In addition to organic growth, the company is expanding its footprint through acquisitions. In January, TLLP closed the North Dakota Gathering and Processing Assets acquisition for approximately $705 million. The acquisition is performing well and is on track to deliver at least $65 million of annual net earnings and $100 million of annual EBITDA in 2017.
Two months later in March, stockholders from Tesoro and Western Refining Corp. voted to approve Tesoro’s pending acquisition of Western Refining. Tesoro remains committed to delivering $350 million to $425 million in annual synergies from operational improvements, value chain optimization, and corporate initiatives, the CEO shared.
Completion of the acquisition remains subject to customary closing conditions, but Tesoro expects to close the transaction by the end of the second quarter.
Among Tesoro’s newer growth initiatives is expansion into Mexico. According to Goff, the country recently announced plans for deregulating downstream markets and is scheduled for liberalizing fuel prices in 2017.
“We have been actively studying this market and evaluating relevant opportunities,” the chief executive explained. “Mexico presents a tremendous opportunity to optimize and grow our integrated footprint along the West Coast, through both branded and unbranded retail growth and supply-related agreements.”
Overall, Tesoro reported first-quarter net earnings from continuing operations of $50 million, compared to $58 million a year ago. Consolidated net earnings were $87 million, compared to $109 million for the same period last year. EBITDA for the first quarter of 2017 was $423 million vs. $411 million one year ago.
Looking at Tesoro’s refining segment, operating income was $34 million for the first quarter, compared to a loss of $93 million a year ago. Segment EBITDA was $181 million vs. $53 million last year.
Turning to Tesoro’s marketing segment, operating income was $133 million; segment EBITDA was $146 million; and fuel margins were 9.6 cents per gallon in the first quarter of 2017. This compares year over year to an operating income of $227 million; segment EBITDA of $239 million; and fuel margins of 13.9 cents per gallon.
The company reported that performance in the quarter was negatively impacted by lower fuel sales due to an abnormally rainy winter in California, partially offset by lower operating expenses. However, it is already seeing demand growth and higher margins in the second quarter.
Goff reiterated Tesoro’s expectations that were made during the fourth quarter of 2016 when the company committed to delivering an estimated $475 million to $575 million of annual improvements to operating income in 2017, comprised of $395 million to $475 million from growth and productivity, and $80 million to $100 million from higher throughput, as well as other operational improvements. These estimates do not include any expected synergies from the pending Western Refining acquisition.
Annual improvements to operating income for 2017 consist of $305 million to $355 million in refining; $125 million to $150 million in logistics; and $45 million to $70 million in marketing.
San Antonio-based Tesoro is an independent refiner and marketer of petroleum products with a retail-marketing system that includes more than 2,400 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline, Rebel and Tesoro brands.