Please ensure Javascript is enabled for purposes of website accessibility

Tesoro's Ambitious Biocrude Plans Couldn't Shake Industry Woes in January

By Tyler Crowe - Feb 4, 2016 at 8:15AM

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

Investors weren't impressed enough with Tesoro's plans to capitalize on renewable fuel regulations to overcome the malaise for refining stocks.

What: Shares of refiner Tesoro (ANDV) declined 16.7% in January as lower refining margins started to sink in. This was in the face of Tesoro's recent announcement that it plans to work with several biomass companies to develop biocrude from renewable biomass.

So what: One of the major costs for refining companies in recent years has been credits for the federal renewable fuel standard. This is a mandate that requires a certain amount of fuel such as gasoline and diesel come from renewable sources such as biofuels and ethanol. For years the primary source of renewable fuel has been ethanol from corn, but it's not exactly a perfect solution. On top of that, Tesoro's large California operations have to comply with California's low-carbon fuel standard. So earlier this month, Tesoro announced that it was teaming up with several renewable-energy companies to convert biomass into a biocrude that can be used in refineries. 

TSO Chart

TSO data by YCharts

This is an important distinction because most renewable fuels produced today are a refined product. If Tesoro and its partners could develop a more crude-like biomass product, then refiners could reduce their compliance costs with the federal standard and could even generate credits under the California law.

As promising as this venture might sound for the future, investors were a little more interested in the short term in January. According to Scotia Howard Weil's weekly refining report, refining margin indicators in every region of the U.S. have compressed in recent weeks, and that suggests Tesoro's profits for the quarter will be lower in the coming quarter. We already saw the effects of lower refining margins, as the company was unable to meet expectations for fourth-quarter earnings.

Now what: These two things, renewable fuels and refining margins, are on the exact opposite sides of an investor's time horizon. Those with a close eye on refining margins are probably looking for short-term gains, while the development of alternative biofuels will likely take years to pay off for the company. As an investor, you need to be able to determine what are the factors that are more important to your investing time horizon. 

Shares of Tesoro have had a good run over the past five years, but shares in prior quarters were looking pretty pricey for a refining stock. Now that Tesoro has slid a little over 30% over the past few months, perhaps this period of weaker margins will present a more attractive buying opportunity for someone looking to capitalize on a company looking beyond the normal scope of an oil refiner. 

Tyler Crowe has no position in any stocks mentioned.  You can follow him at Fool.com or on Twitter @TylerCroweFool.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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
ANDV

*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
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

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.