Tesoro: Activists and Assets
04/27/2017 2:50 am EST
While there has been a recent flurry of company-specific data points that could be perceived negatively, we do not see any of these as particularly material to the longer term investment thesis about why we like the stock.
We continue to believe that closing the Western Refining deal will be a key fundamental and technical catalyst for the stock.
The past few weeks have been particularly tough, with an Energy Index reweighing that caused very heavy volume in a few trading sessions.
In addition, investors were worried over headlines of a proposed 12 cents per gallon gasoline tax increase in California to help fund road repairs.
While each is potentially negative, we are not overly concerned. We see Tesoro as an attractive story in refining, with upside levers from Western Refining (WNR) synergies and the possibility of corporate structure simplification.
The acquisition of Western Refining adds a new element to the story, as it further diversifies Tesoro’s refining geographic mix and adds scale with a top-tier refining asset.
It also adds an interesting Permian Basin growth angle to the midstream story. We think the recent stock weakness is overdone on perceived tough conditions in California.
Refinery margins move opposite the way you typically think of the energy sector. So in the big selloff in energy in recent years the refineries like Tesoro reported record performance.
Tesoro ($9 billion market cap) trades at a discount to net asset value. We think Tesoro is worth at least net asset value. Perhaps one day Buffet buys Tesoro through Phillips 66. Measures of Tesoro's net asset value are $100+.
We see substantial value in the shares with upside potential to net asset value north of $100. We note that recently Boston Partners and Point72 (two well-known investor groups) bought shares near current levels.
Boston bought 3.2 million shares or 2.7%; Point72 bought 6.6 million shares or 5.6%. We have a target price of $110 on the stock and a Sell Price of $75.