Tesoro cut debt by $328 million in 2011, will take out 2012 notes, has no investment-grade goal

By Paul Deckelman

New York, Feb. 2 - Tesoro Corp. cut its debt load by $328 million in 2011, using what the San Antonio-based energy refining and marketing company's chief executive officer termed its "significant" free cash flow, and will retire its remaining 6¼% notes that are slated to come due in November.

But Tesoro has no plans immediately for further debt repurchases, and company executives told investors and analysts on the conference call following the release of financial results for the fourth quarter and full year ended Dec. 31, 2011 that it is not at this time pursuing an investment-grade rating.

'Not chasing' high grade

The company's bond and corporate issuer ratings hover just below that point - Ba1 from Moody's Investors Service, BB+ from Standard & Poor's and BB from Fitch Ratings.

During the question-and-answer portion of the call following the formal presentations by the company's president and CEO, Gregory J. Goff, and by G. Scott Spendlove, the senior vice president and chief financial officer, Spendlove - in answer to an analyst's query as to whether the company plans to go after a high-grade rating after redeeming the $299 million of 6¼% senior notes that mature on Nov. 1 - said that "we visit with the ratings agencies frequently, and their message has been the same to us over the last several years, which is more diversity of earnings [and] more complex refining capacity - things that in our mind don't necessarily drive value, but in their mind mitigate risk and spread it across the system more fully."

He continued that "when we finish paying off the 2012s, I don't think that we're going after [taking out] additional debt for the sake of investment-grade ratings. We're using that cash to pay this debt off because it matures this year, and it puts us in a stronger position financially - but we're not chasing an investment-grade rating by paying off debt."

Goff also said that Tesoro has no plans at this time to re-establish the dividend for equity investors, saying it would instead put the money into capital expenditures and re-visit the idea of a dividend sometime next year.

Debt ratio comes down

Tesoro ended the fourth quarter and the year with $1.7 billion of total debt on its balance sheet, including $1.3 billion of long-term and $400 million of current debt. Total debt was up sequentially from $1.6 billion at the end of the third quarter on Sept. 30, but down from $2 billion at the end of the 2010 fourth quarter and year.

Goff said that although fourth-quarter results were weak, overall, "2011 was an outstanding year for Tesoro," and added that "the strong performance for the year resulted in significant free cash flow, that allowed us to repurchase $328 million in outstanding debt during the year."

That let the company bring its ratio of total debt as a percentage of capitalization to 30% - up sequentially from 28% at the end of the third quarter, but down from 38% a year earlier.

Tesoro took out no debt during the fourth quarter, when the company's operations were under pressure; it swung to a net loss of $124 million, or 89 cents per diluted share, versus a year-earlier profit of $3 million, or 2 cents per share, due to what Goff called "the dramatic change in crude oil price differentials."

However, during the debt-cutting in the first three quarters of 2011, Tesoro repurchased $151 million of the 6¼% notes due in November to bring the outstanding amount down to $299 million from the original $450 million issued in 2005. It also redeemed all $150 million of its outstanding junior subordinated notes that would have come due this year, as well as $27 million of 6½% senior notes due 2017, leaving $473 million out of the original $500 million outstanding.

Besides the 6¼% and 6½% notes, Tesoro's year-end balance sheet also included $450 million of 6 5/8% senior notes due 2015 and $290 million of 9¾% senior notes due 2019.

Undrawn revolver

Spendlove noted that the company had undrawn availability of more than $800 million under the parent company's revolving credit facility.

According to the company's most recent 10-Q report filed with the Securities and Exchange Commission for the third quarter, its Panamanian subsidiary had $20 million drawn under a separate credit facility - although this was well down from $150 million drawn at the start of 2011 - and its Tesoro Logistics LP subsidiary had drawn another $50 million under a separate facility.

Year-end cash and equivalents stood at $900 million - down sequentially from $1.1 billion at the end of the third quarter, but up from $648 million at the end of the 2010 fourth quarter.

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