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Tesoro’s Growth Strategy: Diversifying Its Business Model

PART:
1 2 3 4 5 6 7 8 9
Part 8
Tesoro’s Growth Strategy: Diversifying Its Business Model PART 8 OF 9

Tesoro’s Forward Valuations Compared to Its Peers

Peer comparison

In the previous part of this series, we discussed Tesoro Corporation’s (TSO) historical valuation trend. In this part, we will consider TSO’s forward valuations compared to its peers.

Before we begin our peer comparison, let us consider the market capitalizations (or market cap) of American refiners. Tesoro Corporation’s (TSO) market cap stands at $12 billion. Its peers Marathon Petroleum Corporation (MPC) and Valero Energy Corporation (VLO) have market caps of $27 billion and $34 billion, respectively. Phillips 66 (PSX) has the highest market cap, standing at $44 billion.

Tesoro&#8217;s Forward Valuations Compared to Its Peers

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Tesoro’s forward valuations

Tesoro Corporation (TSO) is now trading at a forward PE (price-to-earnings ratio) of 10x, marginally above its peer average of 9.5x. This is like its peers Marathon Petroleum (MPC), Phillips 66 (PSX), Delek US Holdings (DK), and Western Refining (WNR), which are trading above the group average forward PE.

EV (or enterprise value) and EBITDA (or earnings before interest, tax, depreciation, and amortization) are variables that are subject to change. EV experiences market volatility and EBITDA changes due to a varying business environment. Typically, all other things being equal, stronger refining margins are likely to boost EBITDA levels of refiners. A rising EBITDA results in a lower EV-to-EBITDA ratio, assuming the EV remains unchanged.

Tesoro Corporation (TSO) is now trading at the forward EV-to-EBITDA of 5.7x, marginally above its peer average of 5.5x. Most of the TSO’s peers are trading closer to the average forward EV-to-EBITDA. However, Phillips 66 (PSX) and Northern Tier Energy LP (NTI) are trading way above their averages, at 6.8x and 6.7x forward EV-to-EBITDA, respectively.

The PowerShares Dynamic Large Cap Value Portfolio (PWV) holds Marathon Petroleum Corporation (MPC), Valero (VLO), and Phillips 66 (PSX) in its portfolio. PWV has ~10% exposure to energy sector stocks.

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