Tesoro Corporation (TSO), BP (BP), Valero (VLO): The Best Refiner for Growth

Tesoro Corporation (NYSE:TSO) is one of the largest independent refiners of petroleum products in the United States, and has done very well for its shareholders over the past year or so, rising over 140% since this time in 2012. For a while there, I thought that the stock was getting too expensive, but now I’m not so sure. What’s more, over the past few weeks, Tesoro has pulled back considerably from its high of just under $60, and may now be worthy of serious consideration.

About Tesoro

Tesoro makes over 90% of its money from its refining operations, with the remainder coming from its retail business. Tesoro refines crude oil at its seven refineries, which have a combined refining capacity of 675,000 barrels per day. The end products of the company’s refining operations are gasoline (47.5%), jet fuel (13.6%), diesel (21.6%), and other petroleum products (18.2%).

On the retail side of things, Tesoro sells gasoline and diesel fuel through its network of over 1,300 retail stations, mostly in the western United States. In 2012, Tesoro sold over 1.7 billion gallons of fuel, 14% more than the year before.

Growth: Past and Future

Tesoro has grown tremendously over the past 15 years or so as a result of a series of acquisitions. As a result, Tesoro’s refining capacity has grown from just 72,000 barrels per day in 1998 to over 675,000 today.

Just last year, Tesoro announced that it would be purchasing BP plc (ADR) (NYSE:BP)’s Southern California refining and marketing business for $2.5 billion, including BP’s Carson refinery, which has a capacity of 266,000 barrels per day. This deal should be great for both companies, as it will allow Tesoro to integrate BP’s refinery with its own system, therefore improving efficiency and saving money, and it will allow BP to divest some of its non-core assets and allow the company to focus on more pressing matters. I like BP as an investment as well, and have written about its merits as an investment recently.

Once the BP plc (ADR) (NYSE:BP) deal closes (should happen in the second half of 2013), it still needs to gain antitrust approval, and once it does so shares should experience a nice lift. This deal will give Tesoro one quarter of the entire processing capacity of California (hence the antitrust investigations), and a total production capacity of over 900,000 barrels per day. I think even after this deal closes that Tesoro will continue to pursue acquisitions to increase the company’s footprint.

Valuation

Even after all of the gains of the past year, Tesoro still trades at a very low valuation of just 8.7 times forward earnings, which looks even better considering the company’s excellent balance sheet, which has more cash than debt on it. Tesoro is projected to earn $5.83 per share this year, and $6.26 next year, or forward earnings growth of 7.4%, which I think is conservative, especially if the BP plc (ADR) (NYSE:BP) deal goes through.