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A key analysis of Tesoro’s enterprise value

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What’s EV?

So far, we’ve discussed Tesoro Corporation’s (TSO) financial statements objectively. Now let’s start looking at its metrics subjectively.

First, Tesoro’s enterprise value (or EV) is the complete value of a company, including the market value of its equity (market capitalization) and its net debt (debt less cash).

Think of a company’s EV as the minimum amount you would be on the hook for if you decided to take over the entire company.

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Tesoro’s expanding enterprise value

Tesoro’s market cap is up roughly 18% between 2007 and 3Q14. But starting and ending points can significantly affect these types of analyses. Indeed, if we start with its market cap at the end of 2008, the trough of the financial crisis, Tesoro’s market cap is up ~325% to September 2014.

Tesoro’s cash levels have been strongly and steadily rising over the last seven years or so. From almost nothing at the end of 2007, the company was over $1.5 billion at the end of 3Q14. Its debt has also grown along with its large acquisitions over these years. It added ~$1.3 billion in debt during this period.

Apart from these usual items that make up EV, Tesoro’s spinoff of its Tesoro Logistics (TLLP) business has also added to the company’s expanding EV through the inclusion of Tesoro Logistics’s minority interests. This is done for the sake of accuracy during the calculation of EV-related ratios.

Putting these together, Tesoro’s EV has grown ~28% to ~$10.5 billion at the end of 3Q14 from the end of 2007.

For context, Valero Energy (VLO) had an EV of ~$27 billion, and Marathon Petroleum (MPC) had an EV of ~$29 billion at the end of 3Q14. These refiners and Tesoro are among the top holdings of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

EV ratios

Analyzing Tesoro’s various EV ratios from the table above, we can draw a couple of conclusions. First, Tesoro has been managing its debt levels quite well in the context of its capital and overall size.

Second, from its EV/EBITDA (or earnings before interest, taxes, depreciation, and amortization) and EV/EBIT (or earnings before interest and taxes) valuation multiples, it looks like Tesoro’s profitability has been turning upwards, causing it to trade at lower valuations than recent times. This would explain the recent resilience in the stock.

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