Please ensure Javascript is enabled for purposes of website accessibility

Tesoro -- Sorry, Andeavor -- Gives a Partial Look at the Newly Combined Company This Quarter

By Tyler Crowe - Aug 9, 2017 at 3:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Tight refining margins were too much for Tesoro and Western Refining's combined assets to overcome in the second quarter.

It may go by a new name, but Andeavor's (ANDV) -- formerly Tesoro and Western Refining -- second-quarter results look an awful lot like those of other refiners lately. Low refining margins continued to impact the bottom line, but, fortunately, the combined company's marketing and logistics footprints helped to make up the difference.

Here's a look at Andeavor's most recent results and how they stack up compared to Tesoro's before the merger.

An oil refinery at sunset

Image source: Getty Images.

By the numbers

Metric Q2 2017 Q1 2017 Q2 2016
Revenue $7.85 billion $6.64 billion $6.28 billion
Operating income $218 million $195 million $718 million
Net income $40 million $50 million $418 million
Earnings per share $0.31 $0.43 $3.50

Data source: Andeavor earnings release.

Even though Tesoro and Western completed their merger on June 1 and subsequently changed their name to Andeavor, these results only include one month of Western's results as a combined company. So we can reasonably expect that revenue will most certainly be higher in the coming quarter as we get all three months of operations under one roof.

Operationally, this was a tough quarter for Andeavor. The company took a $209 million cost of market inventory writedown in the quarter that significantly impacted results -- compare that to last year when it netted a $363 million gain. There were also about $124 million in acquisition-related costs. While the inventory valuation changes vary from time to time, these acquisition costs should subside over time.

Outside of refining, Andeavor's results were pretty good. Its marketing segment benefited from an additional 627 branded retail stores and higher wholesale fuel margins. Also, its logistics business -- which includes its investments in Andeavor Logistics (ANDX) and Western Refining Logistics Partners (NYSE: WNRL) -- benefited from the addition of Western and the gathering and processing units it recently acquired in North Dakota.

The refining business was the weak link, though, as gross margins per barrel declined from $15.70 last year to $9.45 this past quarter. When you add in operating costs, that makes for slim profit margins.

ANDV earnings before income taxes by busness segment for Q2 2016, Q1 2017, and Q2 2017. Shows big year over year gains for marketing and logistics, but big decline for refining.

Data source: Andeavor earnings release. Chart by author.

With the Western transaction complete, Andeavor ended the quarter with $1.1 billion in cash and total debt of $7.6 billion, or $3.5 billion if you exclude debt held at Andeavor Logistics and Western Refining Logistics. With all of these companies under one roof, Andeavor now expects to spend $1.35 billion on capital expenditures for the year -- $1 billion for refining and $350 million between the two logistics partnerships.

The highlights

The most obvious newsworthy item this past quarter was the merger, but we won't get to see the combined company in action until the third quarter. Beyond that, the other big moves this past quarter were related to several new investments. The company received the regulatory green light for its Los Angeles Refinery integration plan and the Anacortes Isomerization project. Andeavor also announced that it would be investing heavily in Mexico, starting with a 30,000-40,000-barrel-per-day terminal projects for the states of Sonora and Baja California. Andeavor is looking to get into the now open Mexican market with its ARCO-branded retail stations.

Furthermore, the company announced several new ventures including a joint venture with EP Energy to drill 60 wells in the Uinta Basin in Utah and help Andeavor better utilize its Salt Lake City refinery by using local crudes. 

Finally, the company is making headway on the restructuring of Andeavor Logistics and Western Refining Logistics. Under the proposed plan, Andeavor Logistics and Western Refining will merge into a single entity and Andeavor will exchange its incentive distribution rights for common units. Management has said it was planning this in the past, but it needs shareholder approval from all three entities. 

What a Fool believes

Andeavor looks to be making the right moves so far. It's hard to say whether the integration of Tesoro and Western's refining businesses has paid off because the refining industry is still struggling, but the marketing results look good and restructuring the logistics business into one partnership without incentive distribution rights will give Andeavor Logistics better access to capital in the long run. If management can execute on its growth projects and get this restructuring done without too much trouble, Andeavor should be on the right track.

Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesoro Corporation Stock Quote
Tesoro Corporation
Andeavor Logistics LP Stock Quote
Andeavor Logistics LP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.