We are maintaining our Buy recommendation on Tesoro (TSO) shares despite continued headwinds in the shape of high crude oil prices and weak product demand. Last month, Tesoro reported significantly weaker-than-expected first-quarter losses. We believe that high feedstock and operating costs will continue to weigh on near-term margins. However, our long-term view of the business remains favorable, as margins appear to have bottomed.
Tesoro's 2007 acquisition of Shell's refinery and other assets fits well with its West Coast-focused operating base, where the refining market has above national-average gasoline demand growth. The company's improving financial health enabled the management to start returning cash to shareholders. Tesoro has roughly doubled its quarterly dividend in 2007 and has already completed more than 80% of its $200 million share buyback program initiated in late 2005.
Hence, in spite of the shares of refiners being under pressure, Tesoro's strong leverage in the West Coast market got a boost from the recent Shell refinery acquisition. Its valuation has become compelling following the recent sell-off. Our price objective remains unchanged at $40, based on a 2009 P/E multiple of 11.2x. We believe that Tesoro is better positioned than most of its peers.
Read the full analyst report on TSO
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