Saturday, July 26, 2008

Tesoro has been a painful experience

Boy, has TSO been a terrible timing mistake. I’ve averaged down to $20 and am still well under water. I keep asking myself if I should buy more or exit? I’m leanig toward adding more shares, but in VLO and SUN as all refiners have been killed and I will at least have some diversification to protect against hurricanes and bad hedges.

My thesis was that stand alone refiners were getting killed as oil rose faster than gasoline, but that would soon change and refiners would drag their feet on the way down and earnings would spike. My belief was that the balance sheet was sound and cashflow good so it was only a matter of enduring several quarters of breakeven then the bubble would burst and margins would improve.

So where are we? The balance sheet is solid, if not improved. They have reduced inventory at very high prices and reduced the revolving debt by several hundred million and anticipate being paid to zero by the end of july. The long term debt doesn’t come due for several more years. The plant is modern and several expansions are ready to come on line. Replacement value far exceeds book.

Second, they aren’t very good hedgers and have closed out all derivatives and will take a $125M hit this quarter. Sounds more like a bet rather than a hedge. That worries me.

Crack spreads, an estimate of how much finished product you can get out of a barrel of oil, have been rising. This needs to continue and accelerate.

On the 31st TSO announces earnings and holds their call. I’ll listen to discussion of the past 90 days operations and the hedging debacle, but I’ll be focused on the current quarter. What does the near future look like? I want to hear that the input price of oil is falling faster than demand destructions impact on the other side. I think we’ll hear that.

It’s all gut feeling, but it seems like the air is coming out of oil and that should bode well for refiners like TSO and investors like “the crummy credit analyst” who wants to reclaim the “crusty” moniker.

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