Tesoro expects substantial cash growth, will apply cash to dividend, share repurchases, acquisitions

By Jennifer Lanning Drey

Portland, Ore., Dec. 5 - Tesoro Corp. expects to significantly grow cash flow from operations over the next five years and plans to deploy the cash into dividend growth, share repurchases or facilitating potential acquisitions, Otto Schwethelm, Tesoro's chief financial officer, said Wednesday during a company analyst presentation.

Assuming a constant dividend, Tesoro projects it will generate additional incremental free cash flow starting in 2008 of $420 million and ending with over $4 billion by 2012, he said.

The cash growth will stem in part from a series of growth initiatives aimed at diversification, geographic growth and enhancements to the company's underlying assets and systems.

The company's growth plan continues to focus on organic programs, chief executive officer Bruce Smith said.

"We're not forced to go outside to make acquisitions. Our shareholders should be able to benefit without having to worry about what the next acquisition's going to be," he said.

During the question-and-answer portion of the analyst event, Smith fielded multiple questions as to why a stock buyback isn't currently a higher priority for the company when the stock is considered to be inexpensive.

The CEO said the company has considered the possibility but wants to remain conservative with cash for the time being.

"We measure it and we look at, is there a better way of using cash and I think what we have decided is we're going to let a little more time pass before we're ready to do anything else," Smith said.

"It's really a view of looking at the world as we see it internally with all the different things that we think we can do and it's just a decision now that it's not the best time."

Tried to accommodate Tracinda

Smith also briefly discussed Tracinda Corp.'s decision to withdraw its tender offer for 21.86 million Tesoro shares, saying Tesoro believes it did all that it could to accommodate Tracinda's desire to acquire 20% of the company but was ultimately unable to meet the desire.

"The board felt strongly, with the input of all the advisers that advised the board, that given the fact that we do not have a classified board, that we could not allow somebody to acquire more than 20% without sharing that premium with all shareholders if somebody truly were going to gain control of the company.

"It was a decision not against Tracinda, not against somebody who wanted to acquire control. It was really driven by making sure that all shareholders had the benefit of change of control. It was that simple," Smith explained.

Tesoro is a San Antonio-based petroleum refiner.

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