Tesoro re-evaluating capital spending plan, assuming lower margins through remainder of 2008

By Jennifer Lanning Drey

Portland, Ore., May 28 - Tesoro Corp. is reassessing its capital plan in an effort to improve its competitive position and ability to maintain profitability in lower-margin environments, Bruce Smith, chief executive officer of Tesoro, said Wednesday during an investor presentation at the Deutsche Bank Energy & Utilities Conference in Miami.

"Our goal here is to be profitable no matter what the margin is. We can't tell whether it's going to be good or bad, but it shouldn't make any difference," he said.

After seeing margins dip in the first quarter with rapidly increasing crude oil costs, Tesoro is now beginning to see margin improvements. However, the company is planning cost reductions based on lower margins through the end of the year.

"We're planning on a lower margin environment for the rest of the year and our challenge in that lower-margin environment is to generate free cash flow," Smith said.

The company plans to cut operating and administrative costs, though no major layoffs are expected, he said.

Tesoro will also look to re-optimize its inventory in order to help reduce its debt-to-capitalization ratio.

Additionally, the company is re-evaluating its five-year-old hedging policy but is not yet prepared to announce any changes it might make.

Finally, Smith said Tesoro would focus on organic growth over acquisitions in 2008.

"I'm not saying we'll never make another acquisition, but today we're in that part of the value-creation cycle which is all about just sort of mining what we've put together, and I think that offers good value for our shareholders," Smith said.

Tesoro is a San Antonio-based petroleum refiner.

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