Tesoro starts strategic business review; margins remain under pressure

By Jennifer Lanning Drey

Portland, Ore., July 29 - Tesoro Corp. has initiated a comprehensive strategic review of its business in an effort to improve its competitive position as excess capacity in the refining industry continued to pressure margins during the second quarter, chief executive officer Greg Goff said Thursday.

Speaking during the company's quarterly earnings conference call, Goff said he believes Tesoro has "the right assets in the right markets" but has significant opportunity to strengthen its competitive position.

"In general, we like the western part of the United States and those markets. However, we need to get the performance of certain assets up to a higher level," Goff said.

Tesoro reported second-quarter net earnings of $67 million, compared with a net loss of $45 million in the second quarter of 2009. The 2010 results include one-time net-after-tax benefits of $24 million primarily related to changes to the company's post-retirement benefits programs.

"While we have seen some signs of economic improvement, high unemployment in California and excess refining capacity in the U.S. still weighs on margins and, generally, we continue to plan for a margin environment similar to what we saw in 2009," Goff said.

Focus on cash flow

As a result, Tesoro remains focused on maximizing cash flows and delivering the expected results from its capital and non-capital initiatives, Goff said.

The company ended the second quarter with $191 million of cash and $713 million of available borrowing capacity under its revolving credit facility.

For the year to date, Tesoro's cash is down by more than $200 million as capital expenditures, changes in working capital and interest payments have outpaced EBITDA and tax refunds, chief financial officer Scott Spendlove said during the call.

Capital spending, including turnarounds, was $140 million in the second quarter. The company estimates full-year capital expenditures in the range of $475 million to $500 million.

The company also said it is implementing changes to its corporate overhead and benefits programs that it expects will have an immediate and positive impact on cash flow and earnings.

Tesoro is a San Antonio-based petroleum refiner.

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