Tesoro Corp. (TSO-NYSE, $71.50): A Strong EBITDA Beat in Q3, 2014.

Tesoro Corp reported the fiscal results for Q3, 2014. On almost all fronts, operational performance nicely exceeded street consensus. According to representatives from the company on the conference call, other than a $74 million US mark-to-market gain on crude, operational gains accounted for the significant beat.

EBITDA for Q3 touched $840 million, a record in Tesoro’s corporate history.
Net income for Q3 was reported at $396 million, or $3.05 per diluted share.

Closing cash balances for the quarter grew to $1.53 billion, up from $1.239 billion at the end of Q2, 2014. It should be noted that in the current quarter, Tesoro Corp. allocated $500 million of that cash balance towards a purchase of units of Tesoro Corp. Limited Partnership. Nevertheless, as TSO indicated lower than anticipated capital expenditures for the balance of 2014, it appears as though cash balances should continue to grow through in Q4.

Management has indicated that guidance for all of 2014 should readily surpass prior expectations.

A new fiscal forecast will be updated for analysts at a meeting to be held on December 9th, 2014. Until that time, many covering firms won’t update their published estates. In fact, some analysts that elected to query management on the fiscal quarter’s call seemed rather befuddled; the degree to which posted results bested the street forecasts evidently caught every firm off-guard.

Few analysts took the time to congratulate management on what was, by all accounts, a substantial beat on EBITDA, earnings and cash generation over industry expectations. Anecdotal gleanings, from the tone and nature of the analyst queries, lead me to conclude that many firms have fielded unhappy calls from owners of the limited partnership units (TLLP-NYSE, $56.10). The TLLP units are down roughly 34.6% from their all time high touched on June 10th, 2014. No doubt, firms and accounts that are long both TSO and TLLP are less impressed with the fiscal performance of TSO for the quarter that just ended than, say, holders of Tesoro Corp. on a stand alone basis.

The end of quantitative easing suggests that economic growth in the United States is on steadier footing than has been experienced in some time.

By implication, refiners with owned/operated retail assets appear poised to perform well in the immediate future. Taking into account the cash generating capabilities of Tesoro and coupling that with a forecast reduced capex, for the balance of 2014, implies that any potential blockbuster acquisition envisioned by management (in the $10 billion US range) might be paid for with a reduced equity component.