Stock Quote
Recent Posts
Repeat of Harley (HOG Blog)
September 4, 2008 09:52 PM
The Season Begins!
September 4, 2008 03:41 PM
Photoshop Keyboard Shortcuts
September 4, 2008 10:23 AM
Mac Keyboard Shortcuts
September 4, 2008 09:34 AM
My friends DAYTRADE - I work all day - can I NIGHTTRADE?
September 3, 2008 08:03 PM
Creating New Merged Layer in Photoshop
September 3, 2008 12:22 PM
Texas Hedge
September 3, 2008 10:55 AM
To add an specific blogger's feed, simply go to their blog and click on their individual RSS link.
Bull/Bear Report -- Tesoro Petroleum -- Trash or Treasure?
I recommended Tesoro Petroleum (TSO) to my Rational Investor subscribers in 2003 when shares traded below $5 per share. That was a wise decision in the face of extreme pessimism regarding the oil refining business.
Including a 2 for 1 split shares hit a peak of more than $60 per share. That is a huge gain for those that bought shares five years ago.
Today, shares of TSO are struggling again as the price dropped below $30. That's a 50% haircut from its peak, but still well above its long term lows.
What gives? Well, for starters notoriously skinny profit margins have returned in a big way. Despite record oil prices, refiners are having trouble managing the price they pay for crude and the price they sell finished product.
Such a state has been a big problem for the industry for most of its modern day history, except for the last five years of course. The question for investors today then is will history be the norm or will the last five years usher in a new era of profitability.
The jury is still out.
Our bloggers had a split opinion on this stock. Keep reading to get both sides of the story.
In my mind, I like the industry a lot based mainly on the fact that there hasn't been a new refinery has not been built in years. Capacity constraints dictate that profit margins must expand.
The problem today is the speculation in crude. So many new constituents are participating in the oil trade today that prices have become quite volatile. That volatility hurts refiners even if the ultimate trend is higher prices.
With respect to TSO specifically, I am quite bullish. The company is one of my top picks for 2008 and even though shares have slumped year to date, my conviction has only solidified.
From a fundamental basis TSO looks incredibly cheap. Shares trade for just 7 times trailing earnings and 6 times forward earnings. Going further the company is trading at a mere fraction of sales and just over 1.2 times book value.
That's cheap in my book. Obviously the market is expecting margins to be thin for some time. I believe that opinion is overly conservative and as such I would be bullish on TSO.
Here are two other interesting opinions:
The Bear Case - Ahknaten
TSO makes Ahknaten nervous. He says short TSO, and buy this stock instead.
Someone out there is bound to criticize how I value energy companies. They're going to talk to me about oil reserves and potential finds, and mention upstream and downstream, how oil should be at $150 or $70, biofuels that cause hunger, and how they like DIG DUG. Someone is going to point out that I'm going to talk about a company that is in my portfolio and someone is sure to notice that I have a large position in one of those companies. Some may even realize that I need to sell that particular position at some point to diversify a bit, as 24% in one position is way too large. Then, perhaps I'll complain about an energy company and it'll remind me of the time I complained of FXEN (down -150% with respect to the XLE) and how the Yahoo message boards lit up and attacked me personally. Oh, sometimes I'm wrong, sometimes I'm right, this is just an opinion folks.
So, I'm going to talk about two stocks - TSO and REP, and I'm going to do the usual arrangement on those stocks that I like to do.
REP - Long
Yesterday was a nice day for REP (up 17%) on news that the oil field they have interests in, has significantly more oil than previously expected, and that they might get acquired by China National Petroleum Corp. Cool. That sure helped out my portfolio. My initial position in REP was placed as it had the value story (low PE, price/book), the quality story (low accruals, F-score), few analysts, a growth story, and when I did a valuation of it in eVal I got a price of about $28 Euros ($44 USD). Oh wow, with the momentum today, perhaps some analysts will choose to cover it now and look super smart. Long on REP, but perhaps I'll start selling some soon.
TSO - Short
Today wasn't so bad for TSO, but it wasn't great. Not so cool. I have held TSO at some point, but not anymore. It has somewhat of a value story (low PE, price/book), and although I get a valuation of $42, the quality story isn't great (high f-score, high accruals), and after seeing the last quarter's EPS numbers the growth story isn't all that great either. The stock could be a 'value trap', and so I'll stay away for now. TSO makes me nervous - short.
The Bull Case - Don Barrett
Tesoro Corporation is a oil refinery company headquartered in San Antonio, Texas. TSO operates 7 refineries with capacity of 660,000 barrels a day capacity. Higher oil prices cut the "crack spread", the profit made per barrel, but TSO has a way of fighting rising oil prices. All they have to is do is cut back refinery time and thus drive up the cost of gasoline. TSO has cut refinery operating time from 89.6% in June 2006 and $2.26 dollar a gallon gas to March 2007 refinery operating capacity at 82.2% and gas at $3.29 a gallon. And lest you feel we are facing a shortage of gas were not. Gas supplies in March 2007 are at 11% over March 2006 levels.
TSO net earnings were $801 million or $5.73 per share in 2006 compared to net earnings of $566 million or $4.06 per share in 2007. Net earnings were down in 2007 but TSO has reduced debt, lowered oil costs buy buying more local oil and expanded retail outlets through acquisition.
With the current reduced refining rates by TSO and the other oil companies following TSO's lead it should be a record year. Staying at current reduced refining capacity, it won't take long to burn off the 11% build in gas inventories and the media will be screaming "gas shortages" and it will all result in higher gas prices this summer. Despite what the media and other big wigs tell you oil consumption is down in the U.S. and worldwide and we are paying higher prices due to the reduced usage.
TSO has another ace up their sleeve and I guess all the oil companies do. TSO has over 900 retail outlets so as they reduce production and operating costs, at the same time they are driving up gas prices and all their retail outlets jack the cost per gallon up and TSO has a monster year!
So, in conclusion I don't see how you can go wrong with TSO. If they want a bigger profit they just work less and profits go up. Pretty sweet deal!
Gains in TSO may not be as explosive as they were from 2003 to its peak, but there are still nice gains to be had in my book. This stock has double potential all over it and I am willing to wait. As soon as margins improve, TSO should explode.
Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs
Related Links:
Tags:
Post a comment
