Tesoro (TSO) reported weaker-than-expected fourth-quarter results, reflecting the unplanned outage at the Hawaii refinery and the very weak refining margin environment in all regions of the country, particularly in Tesoro's core of the West Coast region. The company's realized margin during the quarter was down roughly 35% from the year-earlier level as high feedstock costs and relatively moderate product demand ate into margins.
We believe that high feedstock and operating costs will continue to weigh on earnings through the first half of 2008. We are lowering our 2008 estimate ($5.10 vs. $5.95) and introducing 2009 estimate at $5.95.
Despite these relatively weak near-term fundamentals, our long-term macro outlook remains favorable, particularly for the West Coast market. Tesoro's strong leverage to this key market, which got a further boost from the recent Shell refinery acquisition, is particularly valuable.
Valuation has become particularly compelling following the recent sell off, which offers significant upside from current levels. Our new $53 price objective, reduced from $62 before, reflects a 2008 P/E multiple of 10.4x. We believe that Tesoro is better positioned than most of its peers in the current environment given the positive margin outlook for its core West Coast market in the longer term.
Read the analyst note on TSO.
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