(TSO) Tesoro Corporation 2011 Third Quarter Earnings Scorecard

Earlier this month, independent refiner Tesoro Corporation (TSO) announced its financial results for the third quarter 2011.

Now that the analysts have had some time to ponder over the quarterly performance of Tesoro, they are weighing their estimate revisions. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the outlook.

Earnings Review

On November 2, 2011, Tesoro reported stellar third-quarter 2011 results, driven by higher throughput, improved margin environment and solid operational performance.

Earnings per share (excluding special items) came in at $2.39, comfortably surpassing the Zacks Consensus Estimate of $1.83 and way above the year-ago adjusted profit of 51 cents.

The company reported revenue of $8,101.0 million for the three-month period, up 52.3% from the prior-year figure of $5,320.0 million. The result was 18.2% above our projection.

Agreement of Estimate Revisions

Analysts exhibit a strong bullish sentiment regarding Tesoro’s 2011 and 2012 outlooks. In particular, we see a notable number of earnings per share estimate revisions over the past 30 days, indicating that the revisions were in response to the company’s September quarter earnings release.

Out of 14 analysts covering the stock, 10 have revised their estimates for 2011 upward, while none have gone in the opposite direction. The trend is similar for 2012 as well. Out of 15 analysts, 9 raised their estimates as against 2 negative revisions.

Estimates are up for the December quarter of 2011 as well. For the current quarter, 9 of the 14 analysts have increased their estimates over the last 30 days, compared to no negative adjustment.

This uptrend in estimate revisions reflects strong near-term financial results for Tesoro with the expectation that cash flows will be driven by the continued successful implementation of the company’s strategic actions to improve its performance and competitiveness in a cost-effective manner. Given the significant crude sourcing advantage and better margins, we see a consistent stream of earnings from the company’s operations.

Magnitude of Estimate Revisions

As a result of the analysts revising estimates northward over the past 30 days, the Zacks Consensus Estimate for fiscal 2011 has gone up by 97 cents (from $4.73 to $5.70), while for 2012, the estimate has improved by 54 cents (from $3.64 to $4.18). Meanwhile, for the fourth quarter of 2011, estimate has increased by 35 cents (from 78 cents to $1.13) in the last 30 days.

Our Recommendation

San Antonio, Texas-based Tesoro is an independent refiner and marketer of refined petroleum products in the western U.S. The company operates in two segments: Refining (accounted for 72% of the company’s total 2010 operating income) and Retail (28%).

The Refining segment manufactures and sells gasoline and gasoline-blend stocks, jet fuel, diesel fuel, and other refined products to customers, primarily in the mid-continental and the western U.S. This segment also markets liquefied petroleum gas, petroleum coke, and asphalt.

Even though Tesoro – which competes in the ‘Oil Refining and Marketing’ industry with firms like Valero Energy Corp. (VLO) and Western Refining Inc. (WNR) – has a Zacks #2 Rank (Buy rating) in the short run, we are Neutral on the shares in the longer term.

During the last few quarters, Tesoro has consistently achieved profitable growth that has boosted its stock valuation. In the near term, the company stands to benefit from management’s focus on balance sheet improvement. Additional positives for Tesoro include the scale and diversification benefits afforded by its portfolio of seven refineries.

However, Tesoro remains exposed to the risk of dampened U.S. economic growth and weak product demand. Its lack of geographic diversification and excessive dependence on the West Coast market will further limit the ability to generate positive earnings surprises. Given these headwinds, we expect Tesoro shares to perform in line with the broader market in the longer-term.

TESORO CORP (TSO): Free Stock Analysis Report

VALERO ENERGY (VLO): Free Stock Analysis Report

WESTERN REFING (WNR): Free Stock Analysis Report

Zacks Investment Research

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