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%.
Valero Energy Corporation (NYSE:VLO) has a similar EV multiple to Tesoro Corporation (NYSE:TSO). The market values Valero Energy Corporation (NYSE:VLO) at around 3.8 times EV/EBITDA. In the first quarter of 2013, its operating revenue decreased from $35.17 billion in the first quarter of 2012 to $33.45 billion in the same quarter this year, but its operating income improved substantially, from a loss of $244 million to a profit of more than $1 billion. The loss last year was due to $611 million in asset impairment charges of Aruba refinery.
Recently Valero Energy Corporation (NYSE:VLO) spun off its retail business, CST Brands, to focus on refining operations. Valero Energy Corporation (NYSE:VLO) would receive around $500 million in net cash and it still keep around 20% of CST, valued at more than $500 million. After the spin off, its annual G&A expenses are expected to decrease by $50 million per year. The 2012 pro-forma net profit came in at more than $1.9 billion. It has tangible common equity of $16.4 billion while the long-term debt was around $5.4 billion.
My Foolish take
With a cheap EV multiple, all of these refiners look like good businesses to purchase at their current trading prices. HollyFrontier Corp (NYSE:HFC) seems to be the best pick with the highest ROIC at 25.12%, and the highest dividend yield at 2.50%. Tesoro Corporation (NYSE:TSO) could also generate more earnings and EBITDA with BP plc (ADR) (NYSE:BP)’s Carson refinery acquisition. Valero Energy Corporation (NYSE:VLO), with its recent business restructuring and good access to cheap shale oil seems to be a good buy as well.
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The article These 3 Big Refiners Seem Cheap originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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