Tesoro Corporation (TSO), HollyFrontier Corp (HFC), Valero Energy Corporation (VLO): These Three Big Refiners Seem Cheap

Recently, Tesoro Corporation (NYSE:TSO) received the U.S. FTC’s approval regarding its acquisition of BP plc (ADR) (NYSE:BP)’s refinery in Carson, California. It was reported that Tesoro Corporation (NYSE:TSO) paid around $2.38 billion for the refinery, doubling its refining capacity in California. Tesoro’s shareholders must be quite happy as its share price has nearly tripled since the middle of 2012, from $22 per share to more than $61 per share. Should we consider Tesoro Corporation (NYSE:TSO) a buy after the refinery acquisition? Let’s find out.

The acquisition would enhance EPS and EBITDA

Tesoro is one of the biggest refiners in the U.S. with refineries in California, Pacific Northwest, Mid-Pacific, and Mid-Continental regions. In 2012, it had total crude oil capacity output of around 675 thousand barrels per day (mbpd), with California having the highest capacity of 263 mbpd.

The purchase price of nearly $2.38 billion includes nearly $1.1 billion for the BP’s assets and $1.3 billion in the market value of inventory acquired. The company expects to realize significant operational synergies via integrated supply of crude oil, the improvement in manufacturing costs, product distribution costs, and reductions of stationary source air emissions. Tesoro estimated that it would produce around $250 million in synergies, along with additional $225 million in capital expenditure. Interestingly, around $500 million in EBITDA will be generated from BP assets and $0.50 per share would be accretive to the EPS within this year.

Dan Loeb has been quite bullish about Tesoro Corporation (NYSE:TSO) because of three main reasons. Firstly, the company owns significant hidden valuable assets including retail, General Partner interest and pipelines. Secondly, Dan Loeb believes that the market has been undervaluing Tesoro’s upcoming transactions/projects. Moreover, Tesoro Corporation (NYSE:TSO) has quite a shareholder-friendly management, which has focused on creating value for the company’s shareholders.

He also liked BP plc (ADR) (NYSE:BP)’s Carson deal a lot. He wrote: “After deducting working capital and $1.125 billion of logistics and retail value, Tesoro paid about $50 million for a refinery that is estimated to generate $375 million of EBITDA and yield an addition $250 million in annual synergies.” It seems to be quite a cheap price, doesn’t it?

The market values the company at only around 3.8 times EV/EBITDA. Its peers HollyFrontier Corp (NYSE:HFC) and Valero Energy Corporation (NYSE:VLO) are also valued quite cheaply on the market.

The two other refiners are cheap as well

HollyFrontier, at $48.80 per share, is worth $9.9 billion on the market. The market values HollyFrontier Corp (NYSE:HFC) the cheapest, at only 2.63 times EV/EBITDA. HollyFrontier Corp (NYSE:HFC) made a sensible financial move when it redeemed its 9.875% senior notes due 2017 with a principal amount of nearly $287 million, for nearly $301 million. Consequently, the company would reduce its interest expense by more than $28 million yearly.

Moreover, investors could cheer up with its recent announcement of regular cash dividend and the special dividend. The special dividend will be $0.50 per share, payable on June 10 to shareholders of record on May 29, while the regular quarterly dividend would be $0.30 per share. Thus, the trailing twelve months dividend yield would be as high as 7.10%.