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Gold/Mining/Energy : TSO: Tesoro Petroleum Corp. -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (10)	5/8/2008 7:16:04 PM
From: Dennis Roth	Read Replies (1) \| Respond to of 14

Tesoro Corp. (TSO): Limited cash inflows not a concern so long as margins improve - Goldman Sachs - May 08, 2008 What's changed Tesoro reported 1Q 2008 adjusted EPS of -$0.76, excluding a +$0.16/share impact from one-time items, below our -$0.65 estimate and the First Call consensus estimate of -$0.49. The company lowered its 2008 capital spending budget to $870 million from $1.1 billion. Various minor modeling adjustments results in a slight increase to our 2008-2012 EPS forecasts. Implications We continue to have a less favorable view of Tesoro vis-à-vis other refiners we cover given its exposure to a weak California economy and lower leverage to widening light-heavy crude oil spreads; our rating remains Neutral. The company’s negligible cash flow generation over the prior two quarters raises a concern, especially in a rapidly rising crude oil price environment that has significantly increased working capital requirements. We are not trying to overstate this concern, as we are forecasting a pickup in gasoline crack spreads from current depressed levels heading into the summer driving season; we expect Tesoro will generate more meaningful positive cash flow in the coming quarters. However, if gasoline margins were to remain weak, Tesoro may have to more meaningfully reduce capital spending or take other steps to maintain balance sheet health. We currently prefer the risk/reward of refiners with greater exposure to light-heavy crude oil spreads and rising distillate production, with Valero (CL Buy) and Frontier Oil (Buy), our favorites. Valuation We see 11% upside to our unchanged $27, 12-month target price (based on asset value, P/E and cash flow valuation analyses) below the average 17% upside we see for refiners we cover. Key risks Key risk is sustained lower refining margins.