Tesoro Management Discusses Q2 2012 Results - Earnings Call Transcript

Tesoro (TSO)

Q2 2012 Earnings Call

August 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 J. Porter - Former Senior Vice President of Refining

Daniel Robert Romasko - Executive Vice President of Operations

Analysts

Paul Y. Cheng - Barclays Capital, Research Division

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

Chi Chow - Macquarie Research

Douglas Terreson - ISI Group Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Fadel Gheit - Oppenheimer & Co. Inc., Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Tesoro Corporation's Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Louie Rubiola, Director of Investor Relations. Please proceed, sir.

Louie Rubiola

Thank you, Catherine. Good morning, everyone, and welcome to today's conference call to discuss our second quarter 2012 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 for 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

Thank you, Louie. Good morning, everyone and thanks for 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.

Despite significant turnaround activity during the quarter, we delivered solid operating performance with refinery utilization of 87%. This allowed us to capture strong crack spreads and advantaged discounts on crude oil supply. We continued to reduce operating expenses with adjusted manufacturing costs of $4.69 per barrel. The combined result is reflected in our adjusted second quarter earnings of $2.87 per diluted share, and our quarter-end cash balance of over $1.3 billion.

We also made significant progress on several strategic fronts during the quarter. We completed our North Dakota refinery expansion. And today, that refinery is running full at 68,000 barrels per day. That $35 million project is expected to generate over $80 million of annual EBITDA using an average 2011 price environment. If we look at margin so far this year, the annual EBITDA potential increases to about $100 million. And we expect to begin loading the first unit train of price and quality advantage Bakken crude oil destined for our Anacortes, Washington refinery later this month. Our rail and unloading facility with permitted capacity of 50,000 barrels per day is nearing the estimated early September completion.

We continue to expect the new vacuum tower at our Wilmington, California refinery to be operational in the fourth quarter of this year, shifting just under 1 percentage point yield from low valued petroleum coke to light product production. These high return capital projects allow us to expand our advantage position in the Bakken and drive improvements in product yields. The end result is an enhanced competitive position for our refineries and the potential for significant growth in earnings and cash flow.

We also made meaningful progress on our refining and marketing integration with the addition of 165 stations in Southern California from Thrifty Oil Company.

In the third quarter, we intend to add the remaining 9 stations to our retail system completing the Thrifty integration planned schedule for 2012. These additions, along with another 50 sites we expect to add in 2014, should provide between 20,000 and 25,000 barrels per day of ratable and profitable demand allowing us to sustain high refinery utilization.

In addition, we completed the first IPO -- post-IPO asset sale to Tesoro Logistics early in the second quarter generating $75 million of incremental value and demonstrating our commitment to capturing the full value of our logistics assets.

Yesterday, we announced our intent to sell the Long Beach marine terminal and pipeline assets to Tesoro Logistics in the third quarter. These assets support not only our Wilmington California refinery, but other third-party refineries as well. We also reaffirmed our intent to offer the Anacortes Washington rail and unloading facility to Tesoro Logistics. We expect that transaction to occur in the fourth quarter.

The transactions we announced yesterday, which add between $35 million and $45 million of annual logistics EBITDA, combined with organic growth already underway at TLLP, will continue to grow the value of Tesoro's investments in these assets providing additional value to our shareholders.

Read the rest of this transcript for free on seekingalpha.com

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