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.
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|
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.
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 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.