Outlook bullish, but we prefer VLO, FTO, MRO for refining leverage May 03, 2007
Goldman Sachs
What's changed
Tesoro reported 1Q2007 EPS of $1.67, below the $1.85 First Call consensus forecast and our $1.87 expectation. The shortfall versus our estimate was related to higher corporate charges and lower marketing earnings, neither of which we consider to be material. The company expects to close the Los Angeles refinery acquisition from Royal Dutch Shell this month, earlier than original expectations.
Implications
Our upwardly revised 2008E and 2009E EPS for Tesoro are a respective 26% and 66% above consensus for 2008 and 2009. This is despite using what we think could prove to be a conservative California 5:3:2 (ANS) refining margin assumption of $22/bbl for both 2008 and 2009.
Valuation
Our revised $116 ($106 before) 12-month target price for Tesoro corresponds to an 8X P/E multiple of our $14.50 2008E EPS. Since 2004, Tesoro shares have traded at 6X-12X forward consensus EPS.
Key risks
Key risk is lower refining margins.
Impact on related securities
For the refiners, we see our Attractive coverage view as more important than the relative stock calls within the group. We think tight refining supply/demand balances and hence strong margins will persist through at least 2009 owing to delays in major Middle East newbuild projects, seemingly year-round “unplanned” downtime at refineries, and resilient oil demand. Consensus, on the other hand, seems to be assuming a sharp decline in margins in 2008 and 2009 relative to already-conservative 2007 assumptions. Our Neutral rating on Tesoro is a function of its strong ytd performance; we see greater upside in the shares of Valero Energy (Buy), Marathon Oil (Buy), and Frontier Oil (Neutral) at this time. |
