TSO’s Valuations Switched from Discount to Premium over Peer Average
In the previous part, we evaluated institutional ownership in Tesoro (TSO). In this part, we’ll consider Tesoro’s forward valuation compared to its peers.
Tesoro (TSO) is now trading at a forward PE (price-to-earnings) ratio of 15.1x, above its peer average of 13.6x. With respect to its forward EV-to-EBITDA,1 TSO trades 7.0x above its peer average of 6.7x.
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Marathon Petroleum (MPC) trades above its peer averages due to its strategic plan to unlock value for its shareholders by various measures, including dropping down midstream assets to its MLP. PSX commands premium valuations over its peer averages, which is likely due to the diversified nature of its business portfolio.
Tesoro’s valuations versus its peers
Several months ago, Tesoro traded at a discount to its peer average. This was likely due to the rise in debt level to fund TSO’s recent acquisitions in its Midstream and Refining segments. Tesoro’s total debt-to-capital ratio increased to 44% in 1Q17, the highest compared to MPC, VLO, and PSX.
Higher leverage could have been weighing on Tesoro, pushing its valuation below the peer averages. For more on the leverage position of refining companies, you can read Refiners’ Leverages in 1Q17: Who’s Best Placed—MPC, TSO, VLO, or PSX?
With TSO’s completion of the Western Refining acquisition, market participants expect the acquisition benefits to start flowing. Tesoro expects annual synergies of around $350 million–$425 million from the integration of WNR, operational improvements of $475 million–$575 million in 2017, and sharp growth in its Logistics portfolio.
Tesoro’s organic and inorganic growth activities could boost its future earnings. This could be the reason for the rise in Tesoro’s stock price and valuations.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩