Tesoro targeting return to profitability in second quarter through debt reduction, cash flow improvements

By Jennifer Lanning Drey

Portland, Ore., May 7 - Tesoro Corp. is working toward a return profitably by reducing its short-term debt though working capital management and improving its cash flow by reducing costs and redirecting capital, Bruce Smith, chief executive officer of Tesoro, said Wednesday during the company's first-quarter earnings conference call.

"I believe our plan to control costs, unlock cash and redeploy capital is the right program at this point in the cycle. We're obviously not satisfied with the consecutive quarters of losses and now we're solely focused on returning the company to profitability," Smith said.

The company's goal is to be profitable by the second quarter.

During the first quarter, Tesoro experienced lower margins caused by product prices not increasing as quickly as crude oil costs. A large overhang of inventory on the West Coast and slowing demand for transportation fuels also kept margins down, Otto Schwethelm, chief financial officer of Tesoro, said during the call.

Tesoro posted a first-quarter net loss of $82 million, compared to net income of $116 million for the first quarter of 2007.

Capital spending plan reduced

In response to the difficult environment, Tesoro lowered its 2008 capital spending plan to $870 million from a previously announced $1.1 billion. Most projects affected by the reduction were delayed or adjusted in scope.

Tesoro is also continuing its efforts to improve the profitability of its Hawaii and Los Angeles refineries.

"Our goals are real simple here - we plan to generate enough cash flow from operations to fund our high-graded capital program by reducing costs and capital," Smith said.

During the first quarter, Tesoro used its revolving credit facility to fund much of the activity of the company as well as to meet the its monthly cash cycle peaks resulting from cash settlement for domestic and crude oil, Schwethelm said.

At the March 31 quarter end, Tesoro had $1.75 billion outstanding on its revolving credit facility, he said.

"When we began 2008, we knew that the trends from the last half of 2007 would make the year more challenging than the historic highs that we saw in the first half of 2007," Smith said.

"Similarly, we do not expect the future to be like the low-margin environment that we've seen in the first part of this year."

Tesoro is a San Antonio-based petroleum refiner.

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