Tesoro Q3 2010 Earnings Call Transcript

Tesoro (TSO)

Q3 2010 Earnings Call

November 05, 2010 8:30 am ET

Executives

Greg Goff - Chief Executive Officer, President and Director

Louie Rubiola -

G. Spendlove - Chief Financial Officer, Senior Vice President and Treasurer

Everett Lewis - Chief Operating Officer and Executive Vice President

Analysts

Jeffrey Dietert - Simmons & Company

Jacques Rousseau - RBC Capital Markets Corporation

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

Paul Cheng

Chi Chow - Tristone Capital

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

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Greetings, and welcome to the Tesoro Corporation Quarter Three 2010 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Louie Rubiola, Director of Investor Relations for Tesoro Corporation. Thank you. Mr. Rubiola, you may now begin.

Louie Rubiola

Thank you, Rob. Good morning, everyone, and welcome to today's conference call to discuss our third quarter 2010 earnings. Joining me today are Greg Goff, President and CEO; Everett Lewis, Executive Vice President and COO; and Scott Spendlove, Senior Vice President and CFO.

While we will not be referencing slides during the call, we do have a set of slides which was filed with the SEC today. These slides, along with other financial disclosure, should help you in analyzing our results and can be found on our website at tsocorp.com.

Please refer to the forward-looking statement in the earnings slides, which says statements made during this call that refer to management’s expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provisions of the Securities Act, as there are many factors which could cause results to differ from our expectations.

Before I turn the call over to Greg, I'd like to take a minute to share some details regarding our 2010 Analyst Day event in New York. The event will be held Monday afternoon at 2:30 Eastern on December 13 at the New York Stock Exchange. Due to limited seating, reservations will be required. You may register by calling the Tesoro Investor Relations department at (210) 626-6861 or by sending us an e-mail at irelations@tsocorp.com. Reservations will be accepted until the close of business on Wednesday, December 8.

With that, I'll turn the call over to Greg.

Greg Goff

Thanks, Louie. Good morning, everyone, and thanks for joining us on the call today. We are pleased to report third quarter earnings of $0.39 per diluted share or $0.51 per diluted share excluding onetime expenses of $0.12. The onetime expenses are mainly attributable to our maintenance work at the Anacortes refinery. These earnings were achieved with Anacortes idled and Hawaii at reduced rates for a plant turnaround as both industry spreads and our capture rates improved during the quarter.

The Tesoro Index in the quarter was up 17% from the third quarter of last year. This improvement was driven by diesel spreads, which were up more than 50% over last year.

Demand for the distillate barrel is up globally, and we see this reflected in diesel exports, much of which is going to Latin America. In our markets in particular, we continue to see an increase in West Coast seaport traffic, which, during the quarter, reached levels not seen since late 2007. West Coast gasoline spreads meanwhile continued to suffer from weak demand as unemployment in California remains high.

Capture rates throughout our system were up significantly in the quarter, driven by strong clean product yields. Importantly, we were able to produce more diesel, allowing us to capture the stronger distillate margins.

We also saw an improvement in our feedstock costs as we ran an overall heavier diet of crude oil and captured improved light heavy differentials, specifically from Canadians and South American heavy crudes. Retail marketing margins were also strong during the quarter. Spot prices for light products, which generally follow the price of crude oil, fell more rapidly than street prices. However, throughput rates during the quarter were down significantly from last year's third quarter, as we repaired the Anacortes refinery and successfully completed the plant turnaround of our Hawaii refinery during the quarter.

As we reported in our press release, substantial progress has been made towards the restart of the Anacortes Washington refinery. Today, most of the refinery is operating, and we expect to be back to normal operations soon. In addition to completing repairs to the damaged units, we also accelerated extensive future inspection and maintenance work to take advantage of the plant downtime.

We hired a well-respected engineering firm immediately after the incident to conduct a refinery-wide review of equipment, specifically targeting High Temperature Hydrogen Attack or HTHA, which is what we believe was a source of the April 2 accident at Anacortes.

We also hired outside experts to conduct a review process of inspection records related to specific units in order to provide assurance that all of our processes are in accordance with standard industry practices, and they are.

We inspected hundreds of vertical vessels and performed several thousand discrete examinations regarding appropriate alloy content of specific units. We replaced the heat exchangers on the naptha hydrotreater, with new units designed according to current industry standards. And then we also conducted inspections of units at all of our refineries that are in similar service.

While we remain saddened by the human cost of the Anacortes accident, we continue to expect that the overall financial impact of this incident, even taking into account the allegations made by the Washington regulatory agency, will be limited to our insurance deductibles and that we have adequate insurance coverage for this event.

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