Tesoro (TSO) Q1 2011 Earnings Call May 05, 2011 8:30 am ET Executives Gregory Goff - Chief Executive Officer, President and Director Louie Rubiola - Director of Investor Relations Daniel Porter - G. Spendlove - Chief Financial Officer and Senior Vice President Analysts Edward Westlake - Crédit Suisse AG Evan Calio - Morgan Stanley Mark Gilman - The Benchmark Company, LLC Jacques Rousseau - RBC Capital Markets, LLC Paul Cheng Faisel Khan - Citigroup Inc Sam Margolin - Dahlman Rose & Company, LLC Douglas Leggate - BofA Merrill Lynch Jeffrey Dietert - Simmons & Company International Joe Citarrella - Goldman Sachs Group Inc. Ann Kohler - CRT Capital Group LLC Chi Chow - Macquarie Research Paul Sankey - Deutsche Bank AG Blake Fernandez - Howard Weil Incorporated Presentation Operator
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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 Goff Thanks, Louis. Good morning, and we appreciate everyone taking the time to join us on the call today. You have our earnings release, and Scott will go over some of the details of the results in a moment. But I'm going to start with an overview of some recent highlights. During the first quarter, we ran at significant higher refinery utilization rates when compared to both the first and fourth quarters of last year, allowing us to more fully capture strong frac spreads and advantaged crude oil discounts. We also made good progress on our improvement initiatives to drive EBITDA growth. The combined result is reflected in our very strong earnings and positive cash flow for the first quarter. We also announced during the quarter our plans to expand crude oil throughput capacity at our North Dakota refinery by about 17%. This $35 million project, which we expect to complete in the second quarter next year, will allow us to capture more of our advantage crude position in the region. We also successfully executed the initial public offering of Tesoro Logistics, LP. The launch of this MLP [master limited partnership] is an important step in the execution of our logistics growth strategy. And yesterday, as you probably saw, we redeemed the full $150 million outstanding amount of our junior subordinated notes. With earnings strength and debt reduction, we expect to reduce total debt to total capitalization significantly this year, driving towards our goal of around 30%.
We have made good progress in driving operational efficiency and effectiveness, delivering earnings strength and improvement, exercising financial discipline through debt reduction, and positioning ourselves for strategic growth through the MLP. These results are all evidence of our successful efforts to realize our strategic priorities and drive shareholder value.Turning to the quarter, industry crack spreads were up year-over-year, and our refining gross margins were up even more. The first quarter average Tesoro Index gained over $5 per barrel, doubling from the same quarter last year. This improvement was driven primarily by diesel crack spreads, which were up nearly 140% over last year. Gasoline crack spreads were also up, gaining 35% over last year. Global demand growth, especially for distillates, remains strong. U.S. refining margins generally have benefited from the growth in Asian demand and increased levels of U.S. exports to Europe and South America. During the quarter, we also saw marginal improvements in U.S. demand. Capture rates were up materially in the quarter, driven by significantly advantaged crude cost relative to benchmark crude prices and a solid operating performance during the quarter. On the West Coast, we continue to capture wider discounts for foreign heavy crude oil relative to domestic alternatives. In the Mid-Continent, supply length of domestic inland crude oil increased the discounts for these grades relative to waterborne benchmarks such as Brent. For the quarter, our realized gross margin was $14.33 per barrel on a Tesoro Index that averaged $10.54 per barrel. Throughput rates during the quarter averaged 561,000 barrels per day, or more than 84% of total crude oil capacity. This is up from 505,000 barrels per day, or 76% for the fourth quarter last year. The improvement reflects less than unplanned downtime, minimal turnaround activity, and the benefits of Anacortes being back online for a full quarter. Manufacturing cost in the first quarter averaged $5.22 per barrel, a decrease of over $0.50 per barrel from the 2010 fourth quarter, excluding the benefit of $12 million in property damage insurance recoveries accrued last quarter.
Retail marketing margins were down during the quarter, both sequentially and year-over-year. This is typical in a rising crude price environment, where street prices tend to lag, rapid increases in wholesale spot prices. With significantly higher pump prices, we did see a slight reduction in same-store sales. Year-over-year for the quarter, they were down about 1%. However, our total retail fuel sales volumes increased 12% year-over-year, as we completed the previously announced addition of some 300 Shell branded outlets.Read the rest of this transcript for free on seekingalpha.com