Tesoro Corporation Announces Third Quarter 2009 Results and 2010 Capital Budget

SAN ANTONIO, Nov 09, 2009 (BUSINESS WIRE) -- Tesoro Corporation (NYSE:TSO) today reported third quarter 2009 net earnings of $33 million, or $0.24 per diluted share compared to net earnings of $259 million, or $1.86 per diluted share for the third quarter of 2008. For the nine months ended September 30, 2009, net income was $39 million, or $0.28 per diluted share, versus $181 million, or $1.30 per diluted share for the nine months ended September 30, 2008.

Third quarter segment operating income was $137 million compared to $510 million in the third quarter of 2008 as a result of lower gross margins.

The Company's realized gross margin of $9.59 per barrel (/bbl) decreased by $7.10/bbl from a year ago, primarily as a result of lower margins for distillates and narrowing differentials for heavy crudes. West Coast diesel margins averaged less than $10/bbl, down from over $24/bbl in the third quarter a year ago. Discounts for heavy crudes weakened in the third quarter as spot prices for Oriente crude traded at less than $7/bbl below Alaska North Slope crude (ANS) versus more than $13/bbl a year ago. West Coast spot gasoline prices, which traded $12/bbl above ANS in the third quarter last year, increased to over $17/bbl during the quarter. In light of the relative strength in gasoline margins, the Company shifted 6% production into the gasoline pool versus a year ago.

Total system throughput for the third quarter was 564 thousand barrels per day (mbpd), down 9% from the 2008 third quarter. The Company continues to target throughput and inventory levels to meet product demand in our markets.

The retail marketing business recorded $53 million in operating income, versus $34 million a year ago. The 2008 results included a write down and other expenses associated with the closing of certain retail sites. The Company's fuel gross margins in the quarter averaged $0.28 cents per gallon (cpg), slightly down from $0.30cpg a year ago. Operating costs in the retail segment were lower by $7 million versus the third quarter last year due to lower credit card fees associated with lower fuel prices, as well as lower employee costs.

Refining direct manufacturing costs before depreciation and amortization were $248 million in the third quarter versus $238 million in the second quarter 2009. The difference is primarily attributable to higher repair and maintenance costs and increased purchased energy usage.

"We were pleased to report a quarterly profit in this difficult economic environment," said Bruce Smith, Chairman, President and CEO. "Although economic concerns persist in light of high unemployment rates and weak industrial activity, the West Coast region has remained in better balance to current demand as gasoline and diesel inventories remain near their 5-year average. We continue to view the West Coast as an attractive market in which to do business, especially with the increasing stability in gasoline demand we are experiencing through our retail channels." Capital Program Update For the third quarter 2009, capital expenditures were $109 million, including turnaround spending. We expect to spend less than our announced capital budget of $600 million for the full year which includes $40 million for income improvement projects.

The Company's initial 2010 capital budget estimate is $675 million, including approximately $50 million for income improvement projects.

"When we rolled out our 2009 business plan at the end of last year, we said that we intended to improve our cash position and cost structure. We are pleased with the progress we have made on expenses and our cash position has improved. We also stated that it was essential that we see improvement in the marketplace prior to allocating discretionary capital to our asset base. With cost improvements and a good cash balance, we now have an opportunity to begin modest funding of a portion of this program," said Smith. "These organic growth projects have small capital requirements and average one to two year simple paybacks. We believe this is the appropriate time to selectively fund projects that will create value for the shareholders." Quarterly Dividend Update Tesoro announced today that its Board of Directors has revised the quarterly cash dividend to $0.05 per share. The dividend is payable December 15th, 2009 to shareholders of record as of December 1st, 2009.

"While we ended the third quarter with adequate cash to fund our expected 2010 capital budget, the 40% reduction in West Coast margins from September to October has proven that even in times of stability, margins can be volatile. The reduction in our dividend puts us more in line with our historical yield, while allowing this capital to be re-deployed in support of our 2010 business plan, if necessary," said Smith.

Analyst and Investor Presentation The Company will be holding an Analyst and Investor Presentation in New York City tomorrow, November 10, 2009 at 4:30 p.m. ET. Analysts and investors are invited to the Down Town Association in Lower Manhattan to attend the presentation, which will include an update on the 2009 improvement initiatives, the 2010 business plan and capital program. The presentation will be followed by a question and answer session and a cocktail reception with members of senior management. Because space is limited, reservations will be required to attend and accepted on a first-come, first-serve basis. Interested parties should contact Brad McMurray in the Investor Relations department via email at [e-mail] or phone by calling 210-626-4676.

Public Invited to Listen to Analyst Conference Call At 1:30 p.m. CT this afternoon, Tesoro will broadcast, live, its conference call with analysts regarding second quarter 2009 results and other business matters.

Interested parties may listen to the live conference call over the Internet by logging on to http://www.tsocorp.com, or via phone by dialing [phone] (international dial-in: [phone]), event ID 00334395. A telephone replay of the call will be available for one week, and may be accessed via phone by dialing [phone] (international replay: [phone] and entering passcode 334395.

Tesoro Corporation, a Fortune 100 company, is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of approximately 665,000 barrels per day. Tesoro's retail-marketing system includes over 860 branded retail stations, of which over 380 are company operated under the Tesoro(R), Shell(R), Mirastar(R) and USA Gasoline(TM) brands.

This earnings release contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the market environment, and our expectations about our capital spending and our margin capture. For more information concerning factors that could affect these statements see our annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, after the date hereof."

TESORO CORPORATION

STATEMENTS OF CONSOLIDATED OPERATIONS

(Unaudited)

(In millions except per share amounts)

Three Months Ended Nine Months Ended

September 30,

September 30,

2009 2008 2009 2008 Revenues (a) $ 4,742 $ 8,682 $ 12,203 $ 24,175 Costs and Expenses:

Costs of sales and operating expenses (a) (b) 4,492 8,049 11,536 23,351

Selling, general and administrative expenses 55 68 162 178

Depreciation and amortization 102 99 315 288

Loss on asset disposals and impairments 4 14 25 37 Operating Income 89 452 165 321 Interest and Financing Costs (35 ) (30 ) (94 ) (83 ) Interest Income - 2 3 5 Foreign Currency Exchange Loss (3 ) - (13 ) (8 ) Other Income (c) - 1 - 50

Earnings Before Income Taxes 51 425 61 285 Income Tax Provision 18 166 22 104 Net Earnings $ 33 $ 259 $ 39 $ 181 Net Earnings Per Share:

Basic $ 0.24 $ 1.89 $ 0.28 $ 1.33

Diluted $ 0.24 $ 1.86 $ 0.28 $ 1.30 Weighted Average Common Shares:

Basic 138.2 137.1 138.0 136.6

Diluted 139.7 139.4 139.6 139.3 (a) We have reclassified our gains and losses associated with our

derivative instruments for the 2008 periods from "Revenues" to

"Costs of sales and operating expenses" to conform to the 2009

presentation. The reclassifications totaled a $6 million loss and a

$16 million gain during the three months ended September 30, 2009

and 2008, respectively, and losses of $61 million and $192 million

during the nine months ended September 30, 2009 and 2008,

respectively. (b) At both September 30, 2009 and 2008, reductions in petroleum

inventories resulted in decreases of last-in-first-out ("LIFO")

layers acquired at lower per-barrel costs. These inventory

reductions resulted in decreases to costs of sales of $12 million

during the three and nine months ended September 30, 2009 and $68

million and $146 million during the three months and nine months

ended September 30, 2008, respectively. (c) Other income for the three and nine months ended September 30,

2008 represents refunds received from the Trans Alaska Pipeline

System in connection with rulings by the Regulatory Commission of

Alaska concerning our protest of intrastate pipeline tariffs set

between 1997 and 2003.

TESORO CORPORATION

SELECTED OPERATING SEGMENT DATA

(Unaudited)

(In millions)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2009 2008 2009 2008 Operating Income (Loss)

Refining $ 84 $ 476 $ 268 $ 474

Retail 53 34 42 (5 )

Total Segment Operating Income 137 510 310 469

Corporate and Unallocated Costs (48 ) (58 ) (145 ) (148 )

Operating Income 89 452 165 321

Interest and Financing Costs (35 ) (30 ) (94 ) (83 )

Interest Income - 2

3 5

Foreign Currency Exchange Loss (3 ) -

(13 ) (8 )

Other Income (c) - 1

- 50

Earnings Before Income Taxes $ 51 $ 425 $ 61 $ 285

Depreciation and Amortization

Refining $ 86 $ 83 $ 263 $ 239

Retail 10 10 29 32

Corporate 6 6

23 17

Depreciation and Amortization $ 102 $ 99 $ 315 $ 288

Capital Expenditures

Refining $ 91 $ 119 $ 250 $ 407

Retail 1 4

10 10

Corporate 4 7

31 24

Capital Expenditures $ 96 $ 130 $ 291 $ 441

BALANCE SHEET DATA

(Unaudited)

(Dollars in millions)

September 30, December 31,

2009 2008 Cash and Cash Equivalents $ 534 $ 20 Total Assets $ 8,244 $ 7,433 Total Debt $ 1,839 $ 1,611 Total Stockholders' Equity $ 3,238 $ 3,218 Total Debt to Capitalization Ratio 36 % 33 %

TESORO CORPORATION

OPERATING DATA

(Unaudited)

Three Months Ended Nine Months Ended

September 30, September 30,

2009 2008 2009 2008 REFINING SEGMENT

Total Refining Segment

Throughput (thousand barrels per day)

Heavy crude (d)

162 221 176 194

Light crude

361 364 342 380

Other feedstocks

41 37 37 35

Total Throughput

564 622 555 609

Yield (thousand barrels per day)

Gasoline and gasoline blendstocks

289 283 278 282

Jet fuel

79 82 70 80

Diesel fuel

113 158 115 144

Heavy oils, residual products, internally produced fuel

and other

115 132 124 133

Total Yield

596 655 587 639

Gross refining margin ($/throughput bbl) (e)

$ 9.59 $ 16.69 $ 10.04 $ 11.21

Manufacturing cost before depreciation

and amortization ($/throughput bbl) (e)

$ 4.79 $ 5.24 $ 4.90 $ 5.29

Segment Operating Income ($ millions)

Gross refining margin (f)

$ 498 $ 955 $ 1,521 $ 1,869

Expenses

Manufacturing costs

248 300 743 883

Other operating expenses

69 88 205 234

Selling, general and administrative 7 8 19 29

Depreciation and amortization (g) 86 83 263 239

Loss on asset disposals and impairments (h) 4 - 23 10

Segment Operating Income

$ 84 $ 476 $ 268 $ 474

Refined Product Sales (thousand barrels per day) (i)

Gasoline and gasoline blendstocks

309 327 311 330

Jet fuel

92 94 83 95

Diesel fuel

129 164 123 146

Heavy oils, residual products and other

81 97 85 98

Total Refined Product Sales

611 682 602 669

Refined Product Sales Margin ($/barrel) (i)

Average sales price

$ 83.71 $ 131.21 $ 70.17 $ 124.68

Average costs of sales

76.47 117.83 61.72 114.43

Refined Product Sales Margin $ 7.24 $ 13.38 $ 8.45 $ 10.25

(d) We define heavy crude oil as crude oil with an American Petroleum

Institute gravity of 24 degrees or less. (e) Management uses gross refining margin per barrel to evaluate

performance and compare profitability to other companies in the

industry. Gross refining margin per barrel is calculated by

dividing gross refining margin by total refining throughput and

may not be calculated similarly by other companies. Gross refining

margin is calculated as revenues less costs of feedstocks,

purchased refined products, transportation and distribution.

Management uses manufacturing costs per barrel to evaluate the

efficiency of refinery operations. Manufacturing costs per barrel

is calculated by dividing manufacturing costs by total refining

throughput and may not be comparable to similarly titled measures

used by other companies. Investors and analysts use these

financial measures to help analyze and compare companies in the

industry on the basis of operating performance. These financial

measures should not be considered as alternatives to segment

operating income, revenues, costs of sales and operating expenses

or any other measure of financial performance presented in

accordance with accounting principles generally accepted in the

United States of America.

(f) Consolidated gross refining margin totals gross refining margin

for each of our regions adjusted for other costs not directly

attributable to a specific region. Gross refining margin includes

the effect of intersegment sales to the retail segment at prices

which approximate market. Gross refining margin approximates total

refining throughput times gross refining margin per barrel. (g) Includes manufacturing depreciation and amortization per

throughput barrel of approximately $1.57 and $1.39 for the three

months ended September 30, 2009 and 2008, respectively, and $1.63

and $1.35 for the nine months ended September 30, 2009 and 2008,

respectively. (h) Includes a termination charge of $12 million during the nine

months ended September 30, 2009, related to cancelling the purchase

of equipment associated with a capital project at our Los Angeles

refinery. (i) Sources of total refined product sales included refined products

manufactured at the refineries and refined products purchased from

third parties. Total refined product sales margin includes margins

on sales of manufactured and purchased refined products and the

effects of inventory changes.

TESORO CORPORATION

OPERATING DATA

(Unaudited)

Three Months Ended Nine Months Ended

September 30, September 30,

2009 2008 2009 2008 Refining By Region

California (Golden Eagle and Los Angeles)

Throughput (thousand barrels per day) (j)

Heavy crude (d)

147 188 161 163

Light crude

63 66 61 77

Other feedstocks

25 19 23 21

Total Throughput

235 273 245 261

Yield (thousand barrels per day)

Gasoline and gasoline blendstocks

140 135 138 136

Jet fuel

17 19 17 19

Diesel fuel

47 83 53 70

Heavy oils, residual products, internally produced fuel

and other

53 59 59 55

Total Yield

257 296 267 280

Gross refining margin

$ 250 $ 458 $ 771 $ 1,016

Gross refining margin ($/throughput bbl) (e)

$ 11.54 $ 18.22 $ 11.54 $ 14.22

Manufacturing cost before depreciation

and amortization ($/throughput bbl) (e) $ 7.02 $ 7.47 $ 6.72 $ 7.51

Pacific Northwest (Alaska & Washington)

Throughput (thousand barrels per day) (j)

Heavy crude (d)

- 1 - 9

Light crude

145 148 127 148

Other feedstocks

10 13 9 9

Total Throughput

155 162 136 166

Yield (thousand barrels per day)

Gasoline and gasoline blendstocks

69 67 61 66

Jet fuel

33 35 26 32

Diesel fuel

26 32 23 32

Heavy oils, residual products, internally produced fuel

and other

32 34 30 41

Total Yield

160 168 140 171

Gross refining margin

$ 129 $ 205 $ 335 $ 372

Gross refining margin ($/throughput bbl) (e)

$ 9.08 $ 13.76 $ 9.04 $ 8.19

Manufacturing cost before depreciation

and amortization ($/throughput bbl) (e) $ 3.04 $ 3.79 $ 3.74 $ 3.94

Mid-Pacific (Hawaii)

Throughput (thousand barrels per day)

Heavy crude (d)

15 32 15 22

Light crude

51 40 53 48

Total Throughput

66 72 68 70

Yield (thousand barrels per day)

Gasoline and gasoline blendstocks

16 16 17 16

Jet fuel

19 18 18 19

Diesel fuel 12

11 11 11

Heavy oils, residual products, internally produced fuel

and other 20

28 24 26

Total Yield 67

73 70 72

Gross refining margin $ 7

$ 80 $ 78 $ 30

Gross refining margin ($/throughput bbl) (e) $ 1.05 $ 12.15 $ 4.17 $ 1.55

Manufacturing cost before depreciation

and amortization ($/throughput bbl) (e) $ 3.26 $ 3.45 $ 3.07 $ 3.23

(j) We experienced reduced throughput due to turnarounds at the

Alaska and Golden Eagle refineries during the 2009 second quarter,

scheduled maintenance at the Washington refinery during the 2009

first quarter, and scheduled turnarounds at the Golden Eagle

refinery during the 2008 first and second quarters and at the

Washington refinery during the 2008 first quarter.

TESORO CORPORATION

OPERATING DATA

(Unaudited)

Three Months Ended Nine Months Ended

September 30, September 30,

2009 2008 2009 2008

Mid-Continent (North Dakota & Utah)

Throughput (thousand barrels per day)

Light crude

102 110 101 107

Other feedstocks

6 5 5 5

Total Throughput

108 115 106 112

Yield (thousand barrels per day)

Gasoline and gasoline blendstocks

64 65 62 64

Jet fuel

10 10 9 10

Diesel fuel

28 32 28 31

Heavy oils, residual products, internally produced fuel

and other

10 11 11 11

Total Yield

112 118 110 116

Gross refining margin

$ 115 $ 213 $ 337 $ 448

Gross refining margin ($/throughput bbl) (e)

$ 11.50 $ 20.10 $ 11.64 $ 14.61

Manufacturing cost before depreciation

and amortization ($/throughput bbl) (e) $ 3.37 $ 3.12 $ 3.39 $ 3.42

TESORO CORPORATION

OPERATING DATA

(Unaudited)

Three Months Ended Nine Months Ended

September 30, September 30,

2009

2008 2009 2008 RETAIL SEGMENT

Number of Stations (end of period)

Company-operated 387

391 387 391

Branded jobber/dealer 479

492 479 492

Total Stations 866

883 866 883

Average Stations (during period)

Company-operated 388

414 388 432

Branded jobber/dealer 483

495 487 488

Total Average Retail Stations 871

909 875 920

Fuel Sales (millions of gallons)

Company-operated 262

258 775 815

Branded jobber/dealer 83

76 229 211

Total Fuel Sales 345

334 1,004 1,026

Fuel Margin ($/gallon) (k) (l) $ 0.28 $ 0.30 $ 0.19 $ 0.18

Merchandise Sales ($ millions) $ 57 $ 60 $ 159 $ 171

Merchandise Margin ($ millions) $ 14 $ 16 $ 39 $ 44

Merchandise Margin % 25 %

27 % 25 % 26 %

Segment Operating Income (Loss) ($ millions)

Gross Margins

Fuel (l) $ 98 $ 99 $ 189 $ 181

Merchandise and other non-fuel margin 21

22 58 60

Total Gross Margins 119

121 247 241

Expenses

Operating expenses 51

56 153 170

Selling, general and administrative 5

7 21 19

Depreciation and amortization 10

10 29 32

Loss on asset disposals and impairments (m) -

14 2 25

Segment Operating Income (Loss) $ 53 $ 34 $ 42 $ (5 )

(k) Management uses fuel margin per gallon to compare profitability

to other companies in the industry. Fuel margin per gallon is

calculated by dividing fuel gross margin by fuel sales volumes and

may not be calculated similarly by other companies. Investors and

analysts use fuel margin per gallon to help analyze and compare

companies in the industry on the basis of operating performance.

This financial measure should not be considered as an alternative to

segment operating income and revenues or any other measure of

financial performance presented in accordance with U.S. GAAP. (l) Includes the effect of intersegment purchases from the refining

segment at prices which approximate market. (m) Includes impairment charges related to a potential sale of 20

retail stations during the 2008 first quarter and the closure of 42

Mirastar stations during the 2008 third quarter.

SOURCE: Tesoro Corporation CONTACT: Tesoro Corporation Investors: Scott Phipps, 210-626-4882 Managing Director, Finance & Investor Relations or Media: Lynn Westfall, 210-626-4697 SVP of External Affairs and Chief Economist Copyright Business Wire 2009 -0- KEYWORD: United States

North America

Texas INDUSTRY KEYWORD: Energy

Oil/Gas

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Other Energy

Professional Services

Finance SUBJECT CODE: Dividend

Earnings

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Webcast