tso refines and markets petroleum products and provides marine services in the gulf of mexico and the west coast. it operates 836 retail stations. it has refineries located in alaska, hawaii, washington, utah, north dakota and san francisco. its 2007 refinery throughput was about 534,120 barrels per day; and has about 2,150 shareholders.
let's look at tso's recent financial performance first. the company's fourth-quarter results came in lower than expected, with the company reporting a final-period loss per share of $0.29, driven mainly by poor results at the hawaii refinery, where local product prices failed to keep pace with a rise in crude oil prices. results were also hurt by unplanned downtime at this refinery. in addition, tso took an $18 million pretax charge for product inventory movements at its golden eagle refinery. too, refining margins were lower than expected in the company's pacific northwest and mid-atlantic regions.
most, if not all, analysts reduced 2008 share-net estimates. although many of the fourth- quarter problems were one-time events, tso's refinery operating costs continued to climb. they averaged $3.60 a barrel in 2006, rose to $4.40 in 2007, and are liable to increase to $4.75 this year. refining margins across the industry have been on a downtrend since late summer of last year, and most analysts see no sign of a reversal. tso has to make up for lost generation time at its hawaii facility, and throughput will probably be slightly down due to needed upgrades at the recently acquired los angeles refinery, and the replacement of a coking unit at the golden eagle plant.
the company's second quarter will be important; when tso (like other refiners) traditionally generates at least 50% of its annual earnings, driven by the gasoline spring rally. however, due to expected lower demand, and tighter environmental emissions standards in california, earnings don't look to be quite as strong this year.
i think tso's long-term capital gains potential has improved. the equity has fallen considerably since reaching a high of $66 late last year. fears of a protracted downturn or leveling off in the refining cycle, possibly lasting years, has investors nervous. however, tso's west coast holdings should stand it in good stead once an upturn occurs, since west coast refining margins are among the highest in the nation.
a few weeks ago, gas cracks (and implied refinery margins) continued to exhibit upside down behaviour -- the june crack for heating oil was about $28, entirely out of season and insanely overpriced. at the same time, gasoline cracks, entirely in season, remained (in my opinion) insanely underpriced at around $8 in the july crack.
it was clear then that traders were caught massively short in the heating oil crack, assuming that lousy refining margins in the more important and in-season gasoline crack would translate to an easing in the less important and practically useless heating/diesel measure - oops...
entirely upside down action will continue until either there is a return to fundamental pricing in the crude barrel or until a real time shortage from refining maintenance and transport problems emerges in the cash market - i think it's coming soon, but i've thought that for awhile.....
jumping to today, and whether the drubbing that crude is taking is going to be short lived or not, the upside is that in-season gas cracks are getting better fast - better for the refiners that is.
at one point today up more than $2, i think the incredible disconnect i've been expecting for awhile now will begin to be seen - crude will go down, but gas prices will remain relatively unchanged from the high numbers they're at right now.
i believe that it's a good time to get in on refiners at these paltry, tiny, undervalued numbers - about $23.50 for tso, $49 for vlo, etc. if it prints $15 gas cracks, which i think may be coming soon, that will mean tso, vlo, etc. will be making money again - big money, in fact.
disclosure: DO YOUR OWN DD!!; thinking seriously about buying tso at about $23