Tesoro Corporation (TSO, Financial) last month reported second quarter 2014 net income of $224 million, or $1.70 per diluted share compared to net income of $227 million, or $1.64 per diluted share for the second quarter of 2013.
Results from continuing operations were $1.70 per diluted share compared to $1.56 per diluted share for the second quarter of 2013, excluding special items. Special items in the year ago quarter include after-tax transaction and integration costs of $12 million and an after-tax California pipeline settlement benefit of $34 million.
Second quarter highlights
§ Net income of $224 million, or $1.70 per diluted share
§ Delivered $200 million of EBITDA improvements
§ New $1.0 billion share repurchase program authorized
§ Increased regular quarterly dividend by 20% to $0.30 per share
"Our results from continuing operations for the quarter are improved meaningfully over last year reflecting the addition of the Los Angeles refining, marketing and logistics assets and delivery of about $200 million of EBITDA improvements through a combination of synergy capture and other business improvements," said Greg Goff, president and CEO. "Our year-over-year performance for the second quarter clearly demonstrates the value we're delivering through our strategic initiatives and our commitment to delivering on our California synergy and other business improvement objectives. This is especially important when you consider that the Tesoro Index is down over $2.00 per barrel and our stock based compensation expense is up $0.14 per share from a year ago."
For the second quarter 2014, the company recorded segment operating income of $494 million compared to segment operating income of $420 million in the second quarter of 2013. The increase was driven primarily by the addition of the Los Angeles refining, marketing and logistics assets, growth in Tesoro Logistics LP ("TLLP") and improved retail margins.
The refining segment's operating income was $372 million for the quarter, compared to $375 million last year. The Tesoro Index was $12.99 per barrel (/bbl) for the quarter, down over $2/bbl compared to $15.00/bbl last year. The addition of the Los Angeles refinery and the capture of synergies offset the lower margin environment in the quarter, leading to a higher overall capture of the Tesoro Index. The overall gross margin for the quarter was $13.35/bbl or 103% of the Tesoro Index, compared to $14.75/bbl or 98% of the Tesoro Index last year.
Total throughput for the quarter was 816 thousand barrels per day, or 96% utilization. Direct manufacturing costs per barrel in the second quarter 2014 relative to the first quarter 2014 were up $0.23/bbl to $5.88/bbl.
The logistics segment's operating income was $50 million, up $30 million or 150% from the second quarter of 2013. The significant growth has been driven by the acquisition by TLLP of the Los Angeles logistics assets and the Northwest Products System.
The retail segment's operating income was $72 million, a significant improvement from $25 million in the second quarter of last year. Same store fuel sales were higher during the quarter by almost 0.5% versus second quarter last year. Retail fuel margins per barrel were flat relative to the second quarter of last year.
Corporate and unallocated costs were $84 million, including $4 million of corporate depreciation and an expense of $26 million for stock-based compensation. The stock-based compensation provided a benefit of $4 million in the second quarter of last year.
Capital spending and liquidity
Capital spending for the second quarter 2014 was $167 million, which includes $48 million of TLLP capital spending. The company now estimates full year 2014 capital spending, excluding TLLP, of $625 million, a 7% reduction from prior guidance. TLLP capital spending is now estimated to be approximately $200 million, up 25% reflecting expected spending related to the construction of the Connolly Gathering System and the Anacortes truck rack. Turnaround expenditures for the second quarter were $19 million. The company now expects full year 2014 turnaround expenditures of $195 million. Full year 2014 deferred retail branding costs are now expected to be $25 million, a 50% reduction from prior guidance.
The company ended the second quarter with $1.2 billion in cash and $2.3 billion of availability on the Tesoro Corporation revolving credit facility. There are currently no borrowings under the company's revolving credit facility. Excluding TLLP debt and equity, total debt was $1.7 billion or 28% of total capitalization at the end of the second quarter 2014.
TLLP ended the quarter with $228 million in borrowings under its separate revolving credit facility.
Returning cash to shareholders
The board of directors has approved a new $1.0 billion share repurchase program to become effective upon the full completion of the company's current $1.0 billion share repurchase program, expected by the end of 2014.
Tesoro Corporation today also announced that the board of directors has approved an increase in the regular quarterly dividend by 20% and declared a regular quarterly cash dividend of $0.30 per share payable on September 15, 2014, to all holders of record as of August 29, 2014.
During the second quarter, Tesoro returned about $132 million to shareholders through the purchase of nearly two million of the company's shares for $100 million and its regular quarterly dividend. Through the end of July, the company has purchased more than $50 million of additional shares, bringing total purchases to approximately $750 million under the existing $1.0 billion share repurchase program.
Strategic update
Through the end of June, the company, delivered $200 million of EBITDA towards our previously announced synergy and business improvement objectives, and are on track to meet or exceed our full year estimate of $370 to $430 million.
The improvements which are further detailed in the earnings tables below are being realized as expected around the California synergies, enhancing gross margins and business improvements. Evidence of these improvements is clearly reflected in our results.
The permit process for the Vancouver Energy project, to construct a 360 thousand barrel per day crude oil rail-to-marine terminal, is progressing with Washington State's Energy Facility Site Evaluation Committee ("EFSEC"). Several milestones have been reached as the EFSEC approved the land use consistency in July, and has issued the environmental impact study scoping report. The majority of the Preliminary Draft Environmental Impact Study ("PDEIS") was submitted to EFSEC in July and we expect to submit the remaining portion of the PDEIS in August. The facility is expected to be operational in 2015.
