Tesoro Corporation Announces Second Quarter Results

Tesoro Corporation (NYSE:TSO) today reported second quarter 2008 net earnings of $4 million, or $0.03 per share. Net income for the second quarter of 2007 was $443 million, or $3.17 per share. After a marginal tax rate of 39%, unusual items in second quarter 2008 include: Loss of $81 million, $0.58/share in derivative positions mainly related to the long-haul crude hedge program, which was suspended in May, and Gain of $48 million, $0.35/share associated with the permanent reduction to inventory versus the start of the year under LIFO (Last-In-First-Out) accounting. In comparison to last year, lower gross refining margins and higher operating costs were met with reduced refining throughput. Bottom-of-the-barrel products continued their trend of lagging the rapid rise of crude oil prices. During the quarter, fuel oil on the West Coast traded at a $32/bbl discount to ANS crude versus $20/bbl in the first quarter. Total fuel oil production for the quarter was 60 mbpd (thousands of barrels per day) versus a 2007 full year average of 53 mbpd due primarily to planned maintenance activity at our Golden Eagle refinery during the 2008 second quarter. We estimate that our refining operating income was reduced by $71 million or $0.31/share after tax as a result of our refinery turnaround for the planned maintenance. Reported gross refining margins decreased 52% to $10.10/bbl in the second quarter of 2008 compared to $20.98/bbl from a year ago. Manufacturing costs before depreciation and amortization were $297 million for the second quarter of 2008 versus $286 million a quarter ago. Higher energy cost of $27 million related to the increased use and price of natural gas, were offset by an $11 million accrual reversal primarily associated with the retirement of the Golden Eagle fluid coker and $3 million in lower repair and maintenance costs. "The refining sector continues to be impacted by higher crude and energy costs, and lower demand compared to a year ago. Crude prices were up almost $60 per barrel in the quarter, compared to 2007, while preliminary industry data suggests that demand in California is down approximately 5-6%. As a result of these factors, the benchmark West Coast margin was down almost 40% in the quarter versus a year ago. "Our opportunities in this type of environment lie in identifying and executing self-help initiatives such as effectively matching production and inventory levels to consumer demand, optimizing product mix towards more profitable diesel fuel and less discounted fuel oil, and reducing expenses,” said Bruce Smith, Tesoro’s Chairman, President and CEO. Operational improvements for the remainder of 2008 versus the first half of the year include: Refining lower cost crudes through the newly commissioned delayed coker at the Golden Eagle refinery, Refining a greater percentage of lower cost, waterborne crude at the Los Angeles refinery, Performing less planned turnaround activity during the second half of the year, and Implementing initiatives at the Hawaii refinery primarily focused on benefits from processing lower cost crudes. 2008 Goals Update In the first quarter, the company announced its goal to realize approximately $750 million to $1 billion of operating cash flow through reductions in operating costs, capital expenditures and working capital to fund short term debt reductions and the $870 million capital program, including turnarounds. As of July 30th, there were no borrowings on the revolver and the company had a cash balance of approximately $100 million. "The company has done an excellent job executing the plan to lower costs, inventories and capital expenditures without sacrificing safe and reliable operations, and we are positioned to realize further cost reduction initiatives,” said Smith. Board Declares Quarterly Dividend Tesoro announced today that its Board of Directors has approved a regular quarterly cash dividend of $0.10 per share. The dividend is payable September 16th, 2008 to shareholders of record as of September 2nd, 2008. Public Invited to Listen to Analyst Conference Call via Internet At 7:30 a.m., CDT, Thursday, July 31st, 2008 Tesoro will broadcast, live, its conference call with analysts regarding second quarter 2008 results and other business matters. Interested parties may listen to the live conference call over the Internet by logging on to Tesoro’s Internet site at http://www.tsocorp.com. Tesoro Corporation, a Fortune 150 Company, is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of approximately 660,000 barrels per day. Tesoro's retail-marketing system includes over 900 branded retail stations, of which nearly 445 are company operated under the Tesoro®, Shell®, Mirastar® and USA Gasoline™ brands. This earnings release contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the market environment, and our expectations about expense and capital reductions. For more information concerning factors that could affect these statements see our annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, after the date hereof." TESORO CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS (Unaudited) (In millions except per share amounts)           Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Revenues $ 8,754 $ 5,604 $ 15,285 $ 9,480 Costs and Expenses:   Costs of sales and operating expenses (a) 8,561 4,710 15,094 8,258 Selling, general and administrative expenses 58 73 110 142 Depreciation and amortization 99 89 189 158 Loss on asset disposals and impairments 9   3   23   5   Operating Income (Loss) 27 729 (131 ) 917 Interest and Financing Costs (34 ) (30 ) (61 ) (47 ) Interest Income 1 11 3 25 Other Income (b) 4   -   49   -   Earnings (Loss) Before Income Taxes (2 ) 710 (140 ) 895 Income Tax Provision (Benefit) (6 ) 267   (62 ) 336   Net Earnings (Loss) $ 4   $ 443   $ (78 ) $ 559   Net Earnings (Loss) Per Share: Basic $ 0.03 $ 3.26 $ (0.57 ) $ 4.13 Diluted (c) $ 0.03 $ 3.17 $ (0.57 ) $ 4.02 Weighted Average Common Shares: Basic 136.5 135.7 136.3 135.4 Diluted (c) 138.9 139.6 136.3 139.2 Note: Our 2007 results of operations include our Los Angeles refinery assets and retail stations since acquired in May 2007. (a) During the 2008 second quarter, a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory quantities carried at lower costs in the prior year. This LIFO liquidation resulted in a decrease of costs of sales of $78 million for the three and six months ended June 30, 2008. (b) Other income for the three and six months ended June 30, 2008 represents refunds received from the Trans Alaska Pipeline System in connection with rulings by the Regulatory Commission of Alaska concerning our protest of intrastate pipeline rates set between 1997 and 2003. (c) The assumed conversion of common stock equivalents produced anti-dilutive results for the six months ended June 30, 2008 and was not included in the dilutive calculation. TESORO CORPORATION SELECTED OPERATING SEGMENT DATA (Unaudited) (In millions)         Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Operating Income (Loss) Refining $ 85 $ 791 $ (2 ) $ 1,047 Retail (11 ) -   (39 ) (11 ) Total Segment Operating Income (Loss) 74 791 (41 ) 1,036 Corporate and Unallocated Costs (47 )   (62 ) (90 ) (119 ) Operating Income (Loss) 27 729 (131 ) 917 Interest and Financing Costs (34 ) (30 ) (61 ) (47 ) Interest Income 1 11 3 25 Other Income (b) 4   -   49   -   Earnings (Loss) Before Income Taxes $ (2 ) $ 710   $ (140 ) $ 895     Depreciation and Amortization Refining $ 83 $ 79 $ 156 $ 141 Retail 10 7 22 11 Corporate 6   3   11   6   Depreciation and Amortization $ 99   $ 89   $ 189   $ 158     Capital Expenditures   Refining $ 123 $ 176 $ 288 $ 307 Retail 5 1 6 2 Corporate 8   12   17   20   Capital Expenditures $ 136   $ 189   $ 311   $ 329   BALANCE SHEET DATA (Unaudited) (Dollars in millions)     June 30, December 31, 2008 2007 Cash and Cash Equivalents $ 24 $ 23 Total Assets $ 9,640 $ 8,128 Total Debt $ 1,786 $ 1,659 Total Stockholders' Equity $ 2,969 $ 3,052 Total Debt to Capitalization Ratio 38 % 35 % TESORO CORPORATION OPERATING DATA (Unaudited)         Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 REFINING SEGMENT Total Refining Segment Throughput (thousand barrels per day) (d) Heavy crude 184 140 180 119 Light crude 388 441 389 396 Other feedstocks 38 31 33   24 Total Throughput 610 612 602   539   Yield (thousand barrels per day) Gasoline and gasoline blendstocks 280 299 282 246 Jet fuel 82 75 79 69 Diesel fuel 145 140 136 122 Heavy oils, residual products, internally produced fuel and other 135 128 134   123 Total Yield 642 642 631   560     Gross refining margin ($/throughput bbl) (e) $ 10.10 $ 20.98 $ 8.34 $ 17.77 Manufacturing cost before depreciation and amortization ($/throughput bbl) (e) $ 5.35 $ 4.09 $ 5.32 $ 4.22   Segment Operating Income ($ millions) Gross refining margin (f) $ 561 $ 1,168 $ 914 $ 1,733 Expenses Manufacturing costs (g) 297 228 583 413 Other operating expenses (g) 76 59 146 111 Selling, general and administrative 12 8 21 16 Depreciation and amortization (h) 83 79 156 141 Loss on asset disposals and impairments 8 3 10   5 Segment Operating Income (Loss) $ 85 $ 791 $ (2 ) $ 1,047   Refined Product Sales (thousand barrels per day) (i) Gasoline and gasoline blendstocks 334 326 332 289 Jet fuel 92 91 95 90 Diesel fuel 151 138 137 126 Heavy oils, residual products and other 104 99 98   93 Total Refined Product Sales 681 654 662   598   Refined Product Sales Margin ($/barrel) (i) Average sales price $ 135.73 $ 90.92 $ 121.29 $ 84.12 Average costs of sales 125.19 72.05 112.66   68.49 Refined Product Sales Margin $ 10.54 $ 18.87 $ 8.63   $ 15.63 (d) In the 2007 fourth quarter, we redefined heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less. Previously, heavy crude oils were defined as crude oils with a gravity of 32 degrees or less. Heavy and light throughput volumes for the three and six months ended June 30, 2007 have been adjusted to conform to the 2008 presentation. (e) In the 2007 fourth quarter, we revised the calculation of gross refining margin per throughput barrel to include the effect of inventory changes. Inventory changes are the result of selling a volume and mix of product that is different than actual volumes manufactured. The amounts for the three and six ended June 30, 2007 have been recalculated to conform to the 2008 presentation. Previously, gross refining margin per barrel was calculated based upon manufactured product volumes. Management uses gross refining margin per barrel to evaluate performance and compare profitability to other companies in the industry. Gross refining margin per barrel is calculated by dividing gross refining margin by total refining throughput and may not be calculated similarly by other companies. Gross refining margin is calculated as revenues less costs of feedstocks, purchased refined products, transportation and distribution. Management uses manufacturing costs per barrel to evaluate the efficiency of refinery operations. Manufacturing costs per barrel is calculated by dividing manufacturing costs by total refining throughput and may not be comparable to similarly titled measures used by other companies. Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered as alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America. (f) Consolidated gross refining margin totals gross refining margin for each of our regions adjusted for other costs not directly attributable to a specific region. Other costs resulted in an increase of $3 million and decrease of $13 million for the three months ended June 30, 2008 and 2007 and an increase of $4 million and decrease of $12 million for the six months ended June 30, 2008 and 2007, respectively. Gross refining margin includes the effect of intersegment sales to the retail segment at prices which approximate market. Gross refining margin approximates total refining throughput times gross refining margin per barrel. (g) Beginning in 2008, we reclassified certain environmental expenses from manufacturing expenses to other operating expenses. We have reclassified $1 million and $3 million for the three and six months ended June 30, 2007, respectively, to conform to the 2008 presentation. (h) Includes manufacturing depreciation and amortization per throughput barrel of approximately $1.41 and $1.34 for the three months ended June 30, 2008 and 2007, respectively, and $1.33 and $1.36 for the six months ended June 30, 2008 and 2007, respectively. (i) Sources of total refined product sales included refined products manufactured at the refineries and refined products purchased from third parties. Total refined product sales margin includes margins on sales of manufactured and purchased refined products and the effects of inventory changes. TESORO CORPORATION OPERATING DATA (Unaudited)           Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Refining By Region California (Golden Eagle and Los Angeles) (j)(k) Throughput (thousand barrels per day) (d) Heavy crude 144 119 151 95 Light crude 82 82 82 60 Other feedstocks 24   17 22   10 Total Throughput 250   218 255   165   Yield (thousand barrels per day) Gasoline and gasoline blendstocks 129 128 136 85 Jet fuel 20 8 19 4 Diesel fuel 68 56 64 43 Heavy oils, residual products, internally produced fuel and other 53   43 53   43 Total Yield 270   235 272   175   Gross refining margin (e) $ 318 $ 514 $ 558 $ 723 Gross refining margin ($/throughput bbl) (e) $ 13.98 $ 25.96 $ 12.04 $ 24.23 Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 7.87 $ 6.90 $ 7.54 $ 7.73   Pacific Northwest (Alaska & Washington) (j) Throughput (thousand barrels per day) (d) Heavy crude 13 8 12 9 Light crude 153 177 149 163 Other feedstocks 9   9 7   11 Total Throughput 175   194 168   183   Yield (thousand barrels per day) Gasoline and gasoline blendstocks 69 85 65 80 Jet fuel 31 33 31 30 Diesel fuel 36 37 32 34 Heavy oils, residual products, internally produced fuel and other 45   47 45   45 Total Yield 181   202 173   189   Gross refining margin (e) $ 138 $ 341 $ 167 $ 537 Gross refining margin ($/throughput bbl) (e) $ 8.63 $ 19.26 $ 5.47 $ 16.26 Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 3.79 $ 2.65 $ 4.01 $ 2.78   Mid-Pacific (Hawaii) Throughput (thousand barrels per day) (d) Heavy crude 27 13 17 15 Light crude 44   74 52   70 Total Throughput 71   87 69   85   Yield (thousand barrels per day) Gasoline and gasoline blendstocks 16 21 17 21 Jet fuel 19 24 19 25 Diesel fuel 11 16 10 15 Heavy oils, residual products, internally produced fuel and other 27   27 25   25 Total Yield 73   88 71   86   Gross refining margin (e) $ (41 ) $ 54 $ (50 ) $ 84 Gross refining margin ($/throughput bbl) (e) $ (6.33 ) $ 6.78 $ (3.97 ) $ 5.40 Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 3.15 $ 1.90 $ 3.11 $ 1.98 (j) We experienced reduced throughput during scheduled turnarounds at the Golden Eagle refinery during the 2008 first and second quarters, the Washington refinery during the 2008 first quarter, the Los Angeles refinery during the 2007 second quarter and the Golden Eagle and Utah refineries during the 2007 first quarter. (k) Volumes and margins for 2007 include the Los Angeles refinery since acquired in May 2007. TESORO CORPORATION OPERATING DATA (Unaudited)           Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Mid-Continent (North Dakota & Utah) (j) Throughput (thousand barrels per day) (d) Light crude 109 108 106 103 Other feedstocks 5 5 4 3 Total Throughput 114 113 110 106   Yield (thousand barrels per day) Gasoline and gasoline blendstocks 66 65 64 60 Jet fuel 12 10 10 10 Diesel fuel 30 31 30 30 Heavy oils, residual products, internally produced fuel and other 10 11 11 10 Total Yield 118 117 115 110   Gross refining margin (e) $ 143 $ 272 $ 235 $ 401 Gross refining margin ($/throughput bbl) (e) $ 13.86 $ 26.52 $ 11.72 $ 20.87 Manufacturing cost before depreciation and amortization ($/throughput bbl) $ 3.59 $ 2.84 $ 3.58 $ 3.07 TESORO CORPORATION OPERATING DATA (Unaudited)       Three Months Ended Six Months Ended June 30, June 30, 2008 2007 (l) 2008 2007 (l) RETAIL SEGMENT Number of Stations (end of period) Company-operated 437 453 437 453 Branded jobber/dealer 496   438   496   438   Total Stations 933   891   933   891     Average Stations (during period) Company-operated 440 353 443 273 Branded jobber/dealer 497   361   485   315   Total Average Retail Stations 937   714   928   588     Fuel Sales (millions of gallons) Company-operated 270 187 557 244 Branded jobber/dealer 73   57   135   104   Total Fuel Sales 343   244   692   348     Fuel Margin ($/gallon) (m) $ 0.12 $ 0.15 $ 0.12 $ 0.14 Merchandise Sales ($ millions) $ 58 $ 53 $ 111 $ 84 Merchandise Margin ($ millions) $ 15 $ 13 $ 28 $ 21 Merchandise Margin % 26 % 25 % 25 % 25 %   Segment Operating Income (Loss) ($ millions) Gross Margins Fuel (n) $ 41 $ 37 $ 82 $ 49 Merchandise and other non-fuel margin 20   17   38   25   Total Gross Margins 61 54 120 74 Expenses Operating expenses 56 41 114 61 Selling, general and administrative 6 6 12 13 Depreciation and amortization 10 7 22 11 Loss on asset disposals and impairments (o) -   -   11   -   Segment Operating Income (Loss) $ (11 ) $ -   $ (39 ) $ (11 ) (l) The retail operating data for 2007 includes the Shell® and USA Gasoline™ stations since acquired in May 2007. (m) Management uses fuel margin per gallon to compare profitability to other companies in the industry. Fuel margin per gallon is calculated by dividing fuel gross margin by fuel sales volume and may not be calculated similarly by other companies. Investors and analysts use fuel margin per gallon to help analyze and compare companies in the industry on the basis of operating performance. This financial measure should not be considered as an alternative to segment operating income and revenues or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America. (n) Includes the effect of intersegment purchases from the refining segment at prices which approximate market. (o) Represents impairment charges of $11 million during the three months ended March 31, 2008 related to certain retail stations.