Sunoco (IL/A), Tesoro (IL/A): Updating estimates - Goldman Sachs - February 02, 2006
We are updating our 2006-2007 EPS estimates for Sunoco and Tesoro. For Sunoco, our respective 2006-2007 EPS estimates are now $8.20 ($8.45 before) and $8.85 ($9.00 before). Our updated EPS estimates reflect higher operating costs, weak 1Q-to-date benchmark refining margins, and minor other adjustments. For Tesoro, our respective 2006-2007 EPS estimates are now $9.95 ($13.05 before) and $12.25 ($15.75 before). Our EPS adjustments reflect lower assumed California refining margins for 2006 and 2007, higher assumed operating costs and D&A, and minor other adjustments. We continue to rate Sunoco and Tesoro In-Line in the context of an Attractive coverage view as we see greater upside in shares of Valero Energy (OP/A rated). Between Sunoco and Tesoro, we prefer Tesoro shares as Sunoco valuation appears expensive on EV/DACF relative to Tesoro and R&Ms overall.
REFINING MARGINS WEAK 1Q-TO-DATE, BUT OUR 2006 OUTLOOK FOR REFINING REMAINS BULLISH
We remain bullish on the outlook for US refining in 2006 as resilient oil demand, multiple refined product specification changes, and expected above-normal refinery turnarounds are likely to keep overall 2006 refining margins high. There is no change to our Attractive coverage view of the US R&Ms. We see 43% upside to super-spike adjusted peak values for the US refiners on average. In our view, although typical seasonal weakness in 1Q refining margins have been made worse by warm winter weather thus far, we believe investor concerns about the potential for supply disruptions especially during the summer peak driving season (at which point Tier 2 low-sulfur gasoline, ultra low-sulfur diesel, and ethanol mandate will all be in effect) could limit downside risk for R&M shares. On a relative basis, we continue to note the increasingly attractive risk/reward combination for major oil companies, domestic integrateds, and E&Ps versus the R&Ms. While we see 18% upside to "traditional" peak values for the super-cap oils/integrateds/E&Ps on average, we estimate US R&Ms are trading right around our traditional peak values and require trading toward our super-spike valuations to see meaningful upside. US R&Ms currently trade at 6.2X 2006E and 5.6X 2007E EV/DACF (enterprise value to debt-adjusted cash flow) similar to super-cap oil valuations of 6.0X and 5.5X, respectively. See Exhibit 1 for comparative risk/reward and valuation.
SUNOCO'S 4Q 2005 RESULTS SLIGHTLY AHEAD OF EXPECTATIONS
Sunoco reported adjusted 4Q 2005 EPS of $2.19 ($2.12 on a reported basis including special items), slightly ahead of the $2.15 First Call consensus and below our $2.25 forecast. The negative variance between reported results and our forecast was driven by lower-than-expected earnings from non-refining businesses. Gross margins in chemicals and marketing were weaker than expected, while earnings from Sunoco's logistics segment were lower-than-expected largely due to charges from a new accounting interpretation related to asset retirement obligations as well as accrual for retrospective insurance premiums. Gross margin and throughput rates in refining were higher-than-expected.
TESORO'S 4Q 2005 RESULTS BELOW EXPECTATIONS
Tesoro reported adjusted 4Q 2005 EPS of $1.78 ($0.97 on a reported basis including special items), below the $1.91 First Call consensus and our $2.10 forecast. The negative variance was primarily driven by higher-than-expected operating expenses and D&A. Refinery run rates and gross margins were in-line with our forecasts.
INTRODUCING 2006 QUARTERLY ESTIMATES
We are introducing our 2006 quarterly estimates for Sunoco and Tesoro.
For Sunoco, our EPS estimates are $0.96 (1Q), $2.52 (2Q), $2.78 (3Q), and $1.95 (4Q).
For Tesoro, our EPS estimates are $0.54 (1Q), $3.09 (2Q), $3.63 (3Q), and $2.74 (4Q).
Our regional refining margin assumptions are as follows:
- For Gulf Coast-WTI 3:2:1, we estimate $8.00 (1Q), $11.00 (2Q), $12.00 (3Q), $9.00 (4Q), $10.00 (full-year 2006), and $10.00 (full-year 2007) per barrel.
- For New York-Dated Brent 5:3:2, we estimate $8.00 (1Q), $12.00 (2Q), $13.00 (3Q), $10.00 (4Q), $10.75 (full-year 2006), and $11.00 (full-year 2007) per barrel.
- For Chicago-WTI 3:2:1, we estimate $8.00 (1Q), $13.00 (2Q), $14.00 (3Q), $11.00 (4Q), $11.50 (full-year 2006), and $13.00 (full-year 2007) per barrel.
- For MidContinent-WTI 3:2:1, we estimate $6.00 (1Q), $13.00 (2Q), $14.00 (3Q), $11.00 (4Q), $11.00 (full-year 2006), and $13.00 (full-year 2007) per barrel.
- For West Coast CARB-ANS 5:3:2, we estimate $18.00 (1Q), $26.00 (2Q), $28.00 (3Q), $24.00 (4Q), $24.00 (full-year 2006), and $24.00 (full-year 2007) per barrel.
See Exhibit 2 and 3 for summary models of Sunoco and Tesoro.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Arjun Murti, Luis Ahn. |
