Tesoro's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Tesoro (TSO)

Q4 2011 Earnings Call

February 02, 2012 8:30 am ET

Executives

Louie Rubiola - Director of Investor Relations

Gregory J. Goff - Chief Executive Officer, President and Director

G. Scott Spendlove - Chief Financial Officer and Senior Vice President

Daniel Robert Romasko - Executive Vice President of Operations

Analysts

Edward Westlake - Crédit Suisse AG, Research Division

Chi Chow - Macquarie Research

Jeffrey A. Dietert - Simmons & Company International, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Sam Margolin - Global Hunter Securities, LLC, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Tesoro Corporation Earnings Conference Call. My name is Shanelle, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Louie Rubiola, Director of Investor Relations. Please proceed.

Louie Rubiola

Thank you, Shanelle. Good morning, everyone, and welcome to today's conference call to discuss our fourth quarter and full year 2011 earnings. Joining me today are Greg Goff, President and CEO; Dan Romasko, Executive Vice President of Operations; 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 and reconciliations from non-GAAP financial measures, 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.

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

Gregory J. Goff

Thanks, Louie. Good morning, everyone, and thank you for taking the time to join us on the call today. We have our earnings release, and Scott will go over some of the details in a moment.

Despite a weak fourth quarter, 2011 was an outstanding year for Tesoro. We delivered improved reliability and utilization, reduced operating cost on a per-barrel basis and greatly exceeded our EBITDA improvement targets. The result was a net earnings that were comparable to 2007, when the Tesoro Index was nearly $4.50 or 40% higher.

We successfully launched Tesoro Logistics, drove increased refining and marketing integration, reduced debt and developed several strategic capital projects that will create significant value over the next few years. I'll come back and talk more about our full year results in just a minute. But first, let me comment on the fourth quarter.

The fourth quarter experienced very poor West Coast crack spreads and significant volatility in crude oil price differentials. In addition to gasoline crack weakness, we saw unusually high prices for heavy California crude oil, with discounts averaging less than $1 per barrel relative to Brent compared to $7 to $10 per barrel a year ago and in the third quarter.

Offsetting this weakness were Mid-Continent crack spreads that, despite a sharp drop in the Brent-WTI differential, were still more than double what they were last year. Taken together, the Tesoro Index for the fourth quarter averaged $7.50 per barrel, up slightly from a year ago. Our realized margin, on the other hand, was just $6 per barrel or about 80% of the Tesoro Index.

The most significant the driver of lower realized margins in the quarter was the collapse of the WTI to Brent crude oil spread, which fell more from $26 per barrel at the end of September to $8 per barrel at the end of December. Beyond the obvious effect this had on our benchmark margins, this $18 per barrel narrowing in the differential reduced the margin on certain long-haul foreign crude oil barrels the price of waterborne benchmark such as Dubai and Brent but are indexed to WTI. The value of these barrels appreciated along with the WTI without a corresponding increase in product values.

For the fourth quarter, we calculate the negative impact of the WTI-Brent collapse related to these foreign barrels to be about $125 million, which explains most of the underperformance in our overall capture rate for the quarter. For the full year, this effect was a net positive, though the gains we saw in the first 9 months of the year were offset by higher prices for Bakken and Canadian light sweet relative to WTI.

Plant conversion unit downtime in the fourth quarter and preparation for downtime scheduled for the first quarter of 2012 resulted in lower light product yields and a lighter overall crude slate and can be seen in lower capture rates in our California and Pacific Northwest regions. That work reduced fourth quarter total throughput to 567,000 barrels per day or 85% of total capacity.

Manufacturing costs in the fourth quarter averaged $5.03 per barrel, up $0.46 from the third quarter, reflecting higher maintenance spending and lower refinery throughput. Retail fuel sales volumes were up 14% year-over-year for the quarter, with the addition of some 300 stations in the Mid-Continent earlier in the year. Same-store fuel sales during the quarter were essentially flat relative to last year. Retail marketing margins were up during the quarter both sequentially and year-over-year.

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