Is It Worth Holding Tesoro (TSO) Amid Low Refining Margin?

We issued an updated research report on Tesoro Corporation (NYSE:TSO) on Aug 16, 2016. Tesoro is one the largest independent oil refiners in the U.S. We like the company’s solid long-term competitive position on the supply-constrained California market. However, with cost of gasoline, heating oil, and other refined products catching up with beaten down crude prices, crack spreads (or refining margins) for refiners are under pressure.

This balanced outlook is reflected in Tesoro’s current Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Tesoro is a leading independent oil refiner with a combined crude oil processing capacity of approximately 850,000 Bbl/d. Major advantages for the company are the scale and diversification benefits afforded by its portfolio of six refineries.

It is to be noted that the company’s solid long-term competitive position on the supply-constrained California market is an added advantage. With the conclusion of the company’s acquisition of BP (LON:BP) plc's (NYSE:BP) Southern California refining and marketing business, Tesoro now controls 60% of the refining capacity in that state, apart from improving production flexibility.

The weakness on the crude front also favors the refiner. Although crude has recovered significantly from its 12-year lows, it is nowhere near the mid-2014 levels. Hence, with refiners being buyers of crude, their profitability has been boosted by weak input costs.

However, investors' pessimistic outlook stems from Tesoro Logistics LP’s (NYSE:TLLP) (the company's logistics partnership) lack of organic growth and weaker retail fuel margin. To make matters worse, the downstream operator lowered its 2016 operational efficiency improvement guidance by $100 million. Also, stressed crack spreads might affect its near-term profitability.

A Stock to Consider

A better-ranked player in the energy sector is Devon Energy Corporation (NYSE:DVN) . The stock sports a Zacks Rank #1 (Strong Buy).


TESORO CORP (TSO): Free Stock Analysis Report

BP PLC (BP): Free Stock Analysis Report

DEVON ENERGY (DVN): Free Stock Analysis Report

TESORO LOGISTIC (TLLP): Free Stock Analysis Report

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