This time around, independent refiner Tesoro's (NYSE: TSO) West Coast advantage just wasn't enough. After reporting a profit as recently as Q3, the company rounded out 2009 with a major fourth-quarter loss.
Tesoro had been on track for a profitable year, but a number of negative factors coalesced in the final months of 2009 to push full-year results into the red.
CEO Brad Smith cited weak consumer demand, seasonally high inventories -- which may have been exacerbated by hopes of a demand recovery -- and narrow discounts on heavy-grade crude oil. As if all of that weren't enough, sequentially higher energy costs reduced operating efficiency. Told in numbers, Tesoro's gross refining margin sunk to $5.37 per barrel, down from $9.58 in the previous quarter, and $12.47 in the year-ago period.
The poor margin performance translated into a fourth-quarter loss of $0.99 per share. Pile on a goodwill impairment charge related to a 1998 acquisition, and the GAAP loss rises to $1.30 per share. Tesoro isn't suffering alone. Fellow independent Valero (NYSE: VLO) ended the year badly, and the U.S. refining segments of ConocoPhillips (NYSE: COP), Chevron (NYSE: CVX), BP (NYSE: BP), and Marathon Oil (NYSE: MRO) all posted fourth-quarter losses.
For the full year, Tesoro's loss amounted to $1.01 per share, compared to earnings per share of $2.00 in 2008. Results are better on an operating basis. Refining-segment operating profit was $138 million in 2009 -- a far cry from the $673 million notched in 2008, but positive nonetheless. Moreover, 2009 operating cash flow fully covered capex and debt and dividend payments. Going forward, that bodes well for the balance sheet.
In terms of future strategy, management is focused on conserving cash and improving margins via "low cost, high return" facility upgrades. All told, Tesoro estimates that the breakeven margin per barrel will improve by roughly 20% in 2010. Given that the company is forecasting relatively flat end-market demand during the next few years, boosting efficiency will be key to driving profits. On that note, management nixed the dividend and put payouts on suspension until industry dynamics stabilize.
For those who want to speculate on both a stronger economy and limited fuel-efficiency impacts, Tesoro, along with Frontier Oil (NYSE: FTO), is probably one of your best bets.
But I do mean bets.
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