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Restructured Tesoro is Riding High

Posted on: Saturday, 15 April 2006, 00:00 CDT

By Vicki Vaughan, San Antonio Express-News

Apr. 14--Here comes Tesoro.

The refiner, which struggled with quarterly losses as recently as 2004 and has battled to pay down debt, is on a roll.

Profit for the San Antonio-based company jumped 55 percent in 2005 to set a record, and its six refineries achieved record levels of production. Last week, Tesoro's stock was trading at more than $71 a share, approaching a 52-week high hit in January.

Last year, the company's stock appreciated almost 94 percent, vaulting it to 12th place on the Standard & Poor's 500.

And Tesoro, which barely edged into the Fortune 500 in 2000, now ranks 132nd, with revenue of almost $16.5 billion.

At the company's sleek headquarters at 300 Concord Plaza Drive near U.S. 281, a sense of excitement is clear. Tesoro executives, who have been somewhat publicity-shy in the past, are touting the company's stock on Wall Street and to investors, including hedge fund managers, as far away as Europe. Tesoro recently sent shareholders a full-color annual report after a few austere years in which the company didn't print a fancy one to save money.

It's a new era.

"We've grown into a more professional and focused organization," said CEO Bruce Smith, who looked confident and relaxed on a recent Friday in the company's boardroom. "It's subtle, what we're trying to do, but we're seeing results.""I think they're a success story," said David Hackett, president of Stillwater Associates, a California-based energy consulting firm. In January, Tesoro made Forbes magazine's Platinum 400 list, ranking as one of the top 10 oil and gas companies based on five-year annualized total return.

Tesoro began to hone its strategic plan early last year after top management examined the company's structure.

"I knew we had a lot of inefficiency, and I wanted to lower costs," Smith said. "We had a number of people doing somewhat the same things. And we had no common ways of looking at problems." Smith saw he "had a lot of boxes to fill -- a lot of voids." So he launched a restructuring early last year. Some longtime Tesoro executives retired.

"They were very talented people," Smith said, but some didn't fit the jobs he needed.

Smith then strengthened the company's management team by recruiting 25 executives from outside, pulling them from various companies. "Today, we have a real mixture of people from different organizations," he said. "It's a highly motivated, passionate team." Smith himself brings years of varied experience to Tesoro. He joined Valero Energy Corp. as its treasurer in 1986. Before that, he was an executive at Continental Bank, doing stints in Chicago, London and Houston, where he met Bill Greehey, now Valero's chairman.

Another result of the restructuring is that "we are much more highly centralized," Smith said. Today, almost every task once accomplished at one of Tesoro's six refineries is handled from the company's headquarters.

Smith is stressing communications, too. "We've always been an open company, but we didn't go out and talk about ourselves much." He's ramped that up, hiring a vice president of corporate communications and beefing up internal communications.

The roots of today's changes go back to 1996-97, when Tesoro, then Tesoro Petroleum, decided it couldn't grow its exploration and refining businesses at the same time and opted to be only a refiner. "We were lucky in that we were able to acquire some refineries at favorable prices," Smith said.

But the plant that's now the company's crown jewel, the Golden Eagle refinery north of San Francisco, acquired in 2002, wasn't cheap. The purchase put Tesoro's debt at 69 percent of market capitalization. Yet the acquisition was critical, Smith said, "because at the time we wanted to gain critical size and scope." Tesoro has worked to pay down debt, and the discipline has paid off. At the end of last year, the company's debt-to-capitalization ratio had been reduced to 36 percent, compared with 48 percent at the end of 2004.

Today, what the company owes is of less concern, Smith said, because Tesoro has no callable debt. "There's no value of our shareholders to repay debt," Smith said.

It's more important now to concentrate on Tesoro's capital budget improvement projects, Smith said. The company will spend $670 million this year to make additions at its refineries will boost yields and help Tesoro process more heavy crude from Canada. Refinery upgrades at two plants will be finished late next year and should make solid contributions to the bottom line in 2008, Smith said.

Consultant Hackett said that Tesoro's refineries on the West Coast benefit the company because "refining margins are higher on West Coast than in other parts of the country." West Coast refining margins have reached about $16 a barrel, far above the $7 margins in most of the rest of the country, said Oil Daily, an industry trade publication.

Tesoro also is a major marketer of gasoline, with 478 retail stations whose strongest presence is in the West and upper Midwest. Its presence in the West helped the company in the aftermath of Hurricanes Katrina and Rita last fall. Because of their locations, Tesoro's plants suffered no storm damage. But when profit margins were the strongest, "Tesoro's refineries were cranked up all the way," the company said in its annual report.

"It was a challenge to meet customer demand," Smith said, but Tesoro's new managers rose to the occasion. "We hired people with significant experience, and when the hurricanes hit I was really impressed by what we accomplished." For example, the company secured some crude oil that was bound for Gulf Coast refineries, and "we got it at advantageous prices. That was very good for our shareholders." Smith often repeats that mantra, "Good for our shareholders," and his strategic planning is focused on that goal. To show his faith in the company, Tesoro has been buying back its stock, and has spent $95 million to buy back 1.5 million shares.

But could Tesoro's success make it an attractive takeover target? Ivan Feinseth, director of research at Matrix USA, an institutional research and brokerage firm in New York, said Tesoro could be acquired by a company its size or larger. "I think you're going to see more and more consolidation in oil, and there's nothing that would block them being purchased," he said.

An acquiring company would have to pay a premium for Tesoro, Feinseth said, because "we think the stock is worth a lot more than it's trading at. It could be worth $100 a share." The company "is designed so that we can be taken over if that is the best way to enhance shareholder value," said chief economist and vice president of strategic planning Lynn Westfall. The company's bylaws contain no poison pills, and outside directors would make the ultimate decision, since Smith is the only Tesoro manager on the board and he doesn't sit on a board committee, Westfall said.

Tesoro's stock took a hit Thursday, however, after it issued a first-quarter earnings warning, saying it was lowering its per-share estimate to 60 cents, below analysts' expectations of 74 cents. Tesoro said it would take a quarterly charge related to hedging losses.

Tesoro remains on the lookout for other assets in refining and marketing. "The most obvious place to look is in the Western U.S.," Smith said, "but I know there are limited opportunities there." Refining is a good business to be in now, Smith said, because he sees a shortage of refining capacity around the world for some time, "and that means higher fuel prices." Even if gasoline rises to an average of $3 a gallon, Smith doesn't believe that Americans will substantially change their driving habits. "Consumers may not like $3 gas, but at the end of the day I don't think they'll change much. I don't think Americans will go out and buy flex-fuel vehicles (using ethanol) in big numbers." Smith is clearly pleased with the way things are going.

"We think the overall refining environment is going to continue to be good for the next several years," he said. "One of our guys keeps saying: 'This is not your father's Tesoro.'"

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TSO,

Source: San Antonio Express-News

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