[sammyg2]

Talk about pisspoor timing, I missed out on over $50k I could have gotten if I would have waited:

Tesoro Strikes Gold in California
By ANDREW BARY |

Wall Street has started to appreciate the gritty appeal of oil refiner Tesoro. With a transformative new acquisition, there's a lot more to love.

Tesoro, the West Coast oil refiner, may have pulled off the acquisition of the year when it reached a deal last month to purchase a large California refinery from BP for $1.175 billion.

By Tesoro's calculations, it paid virtually nothing for the refinery—in Carson, south of Los Angeles—when considering other assets included in the deal, such as pipelines, other energy infrastructure, gas stations, and the ARCO brand. The BP (ticker: BP) refinery could be worth $1.5 billion or more, which is significant relative to Tesoro's (TSO) market value of $5.6 billion.

Wall Street liked the transaction, and it has warmed to the entire group of domestic oil refiners this year. The five major independents, Marathon Petroleum (MPC), Phillips 66 (PSX), HollyFrontier (HFC), Valero Energy (VLO), and Tesoro, are up an average of 50% in 2012, making refiners one of the market's top-performing groups.

Tesoro is among the best of the bunch, with a 69% gain to $40 (over $41 today). A further advance could be in store because of the company's enhanced West Coast muscle. Tesoro CEO Gregory Goff called the deal "transformational" and "immediately and highly accretive to earnings." Investors pushed Tesoro stock up about 10% afterward. The shares still look appealing, trading for 6.8 times projected 2012 profit of $5.84 a share.

The bargain purchase of a BP refinery enhances Tesoro's existing strength on the West Coast.
.After initially trumpeting the benefits of the BP deal, Tesoro seems to be taking a lower profile, perhaps because it doesn't want to alienate antitrust and other regulators that must approve it. Tesoro declined to speak to Barron's.

"It's our favorite stock in the group," says Paul Cheng, the refining analyst at Barclays. He argues that the company's earnings power was underappreciated even before the BP transaction in view of steps the company had taken to boost output and improve operations. Cheng says Tesoro's trough annual earnings are likely to be $5 a share. He has an Overweight and an admittedly high price target of $84. A more realistic target would be $60, or about 10 times estimated 2012 profit.

Refiners are in vogue because of ample earnings, higher dividends, and improved perceptions about the industry's long-term prospects. Many are benefiting because they have refineries in the middle of the country, where crude oil is cheap relative to world prices because of growing supply and insufficient pipeline capacity to bring that oil to the Gulf Coast. This is leading to high refining margins based on wide "crack spreads," which refers to the profits from converting crude into gasoline and other petroleum products.

THE CURRENT POPULARITY CONTRASTS with gloom a few years ago as investors worried about the viability of refineries amid weak gasoline demand, slim margins, and the threat of cheap imported oil products.

With capital spending down, refiners, including HollyFrontier and Valero, are boosting dividends, and more big increases are possible because of considerable free cash flow. Cheng says the major independents are easily capable of paying 4% dividends.

Tesoro initiated a payout of 12 cents a share in August, for a yield of 1.2%, and could pay a multiple of that, given its earnings power. It has an excellent balance sheet with just $400 million of net debt. The refiner also owns 50% of a master limited partnership, Tesoro Logistics (TLLP); the share is worth more than $600 million.

Tesoro was able to negotiate attractive terms on the refinery purchase because BP was a motivated seller, restructuring its global operations to focus on energy production and raising cash to cope with tens of billions of dollars in liabilities stemming from its Gulf of Mexico oil spill in 2010. Tesoro was a uniquely positioned buyer because it owned a refinery next to the BP facility and already had extensive pipeline, storage, and logistics assets in California.

The BP pipeline and other infrastructure assets are likely to be sold for $1 billion to the Tesoro Logistics partnership. The company pegs the value of the BP retail assets at $125 million, meaning it effectively is paying only $50 million (based on the $1.175 billion price minus the $1 billion and the $125 million) for the 266,000-barrels-a-day Carson refinery. Tesoro now owns seven refineries with a combined capacity of 675,000 barrels a day. The BP refinery generates about $500 million of annual cash flow, which would put its worth at $1.5 billion using currently low industry valuations.

A bullish Tesoro released unusually detailed forecasts after the deal. It projected that it could boost profits by 24% in both 2013 and 2014. That would result in earnings of close to $6 a share in both years, based on then-prevailing consensus estimates.

Many refiners have shunned California because of tight regulations on refinery emissions and strict pollution controls on gas. That makes the Golden State a virtual island because gas refined elsewhere often doesn't meet its standards. The weak economy also has soured refiners on the market, but Barclays' Cheng says conditions are improving.

The Bottom Line
Although the stock has surged 69% this year, Tesoro is still cheap and could rise more than 40% in the next year. The company owns seven refineries in the U.S.

.Tesoro had an excellent second quarter, when it earned $2.75 a share, and the current quarter also looks strong, in part because of a fire last month at a big Chevron refinery near San Francisco that cut output and lifted California refining margins. Profit estimates for the current quarter have risen, with Morgan Stanley energy analyst Evan Calio last week lifting his third-quarter projection to $2.69 a share from $2.22. The consensus is below $2. Tesoro has consistently bested its West Coast peers in profit margins.