Tesoro (TSO) Q2 2011 Earnings Call August 04, 2011 8:30 am ET Executives Gregory Goff - Chief Executive Officer, President and Director Louie Rubiola - Director of Investor Relations G. Spendlove - Chief Financial Officer and Senior Vice President Daniel Romasko - Executive Vice President of Operations Analysts Edward Westlake - Crédit Suisse AG Evan Calio - Morgan Stanley Mark Gilman - The Benchmark Company, LLC Jacques Rousseau - RBC Capital Markets, LLC Paul Cheng Douglas Leggate - BofA Merrill Lynch Jeffrey Dietert - Simmons & Company International Chi Chow - Macquarie Research Paul Sankey - Deutsche Bank AG Blake Fernandez - Howard Weil Incorporated Presentation Operator
Please refer to the forward-looking statements 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 will turn the call over to Greg.Gregory Goff Thanks, Louie. Good morning, everyone, and thanks for taking 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 second quarter, we again increased refinery utilization rates, running total crude oil throughput to 578,000 barrels per day or about 87% of total capacity, the highest level since the third quarter of 2008. This allowed us to more fully capture strong crack spreads and advantage discounts on crude oil. We made good progress on our improvement initiative to drive EBITDA growth with another quarter of gross margin improvement in excess of the market gains. The combined results is reflected in our very good second quarter earnings of $1.65 per diluted share excluding special items, the most profitable quarter for Tesoro since the third quarter of 2008. This strong financial performance, along with the successful initial public offering of Tesoro Logistics during the quarter, allowed us to pay down $244 million of debt, taking us to less than 31% of total debt to total capitalization, moving closer to our goal of below 30%. We also announced our plans to take Bakken crude oil to our Anacortes refinery, allowing us to leverage our advantaged logistical position in North Dakota as well as provide a high-quality, lower-cost feedstock supply to Anacortes.
Relative to ANS crude oil, Bakken crude oil yields about 16% more clean products and less fuel oil. During the second quarter, the differential between those products was about $28 per barrel, providing a more than $4 per barrel overall advantage. Similarly, today we are announcing a project to replace the vacuum distillation unit at our Los Angeles refinery, which will allow us to improve clean product yields and reduce greenhouse gas emissions. We expect to shift just under 1% of the refinery yield from petroleum coke production to clean products. During the second quarter, the differential between those products was about $100 per barrel. These projects are good examples of how we are driving system improvements designed to achieve high returns, short payback periods and deliver sustainable earnings. Also during the quarter, we received approval from the Public Utilities Commission in Hawaii regarding the revised fuel oil supply contracts with both Hawaiian Electric Company and Kalaeloa Partners. Our priorities relative to our cash position are to: One, further strengthen our balance sheet with additional debt reduction; two, invest in business improvements designed to yield high-yield, high-sustainable returns with short payback periods; and three, maintain a prudent cash balance to continue to take advantage of commercial opportunities to drive a high capture rate.Turning to the quarter, industry crack spreads were up year-over-year and our refining gross margin were up even more. The second quarter average Tesoro Index gained over $2 per barrel. Feedstock cost advantage, particularly in the mid-continent, drove the benchmark index higher during the quarter. West Coast benchmark crack spreads were generally flat, both sequentially and year-over-year. Incremental U.S. exports of distillates and the continued global economic recovery provided support to distillate crack spreads during the quarter. However, rising retail street prices, which peaked in early May, tempered gasoline demand. Capture rates were very strong in the quarter, driven by significantly advantaged crude oil costs relative to benchmark grades for crude oil.
On the West Coast, we continue to capture wider discounts for heavy crude oil, both domestic and foreign grades, particularly as compared to the West Coast benchmark ANS, which got expensive during the quarter. In the mid-continent, high levels of domestic crude oil inventories increased the discounts for these grades relative to benchmark such as Light Louisiana Sweet. For the quarter, our realized gross margin was $16 per barrel, excluding the gain from business interruption insurance proceeds on a Tesoro Index that averaged $12.18 per barrel. This was achieved despite turnaround activity at our Golden Eagle refinery.Read the rest of this transcript for free on seekingalpha.com