uploads///Cash Flow

What Does Tesoro’s Cash Flow Analysis Suggest?


May. 31 2016, Updated 7:04 a.m. ET

Tesoro’s cash flow analysis

Tesoro’s (TSO) 1Q16 cash balance fell 4% to $439 million compared to 1Q15. This was due to lower cash inflow from operations coupled with higher cash outflow. This was due to capex (capital expenditures) from investing and acquisitions and dividends and debt repayments from financing.

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Cash flow from operations and investing

In the second and third quarters of 2015, Tesoro’s cash flow from operations was robust due to stronger refining margins and earnings. But with the fall in refining earnings in the past couple of quarters, cash flow from operations fell to $184 million in 1Q16.

But the company has continued its focus on growth. From 1Q15 to 1Q16, TSO committed an average of $249 million per quarter to fund its investing activities. In 1Q16, Tesoro closed the acquisition of Great Northern Midstream. So in 1Q16, its cash outflow from investing activities rose to $535 million.

Tesoro’s cash flow from financing: Rising dividend yield

TSO’s cash flow from financing activities is mainly comprised of changes in debt, dividend payments, and share buybacks. In 3Q15, Tesoro partly repaid debt, raising cash flow from financing to $724 million.

In 1Q16, Tesoro’s (TSO) cash outflow due to dividends rose by 11% over 1Q15 to $60 million. With a rise in dividends and a fall in stock price, Tesoro’s dividend yield rose. Currently, Tesoro (TSO) trades at a dividend yield of 2.6%. This is higher than Tesoro’s dividend yield of 1.4% in 1Q15.

Tesoro’s peers Western Refining (WNR), Marathon Petroleum (MPC), and HollyFrontier (HFC) currently trade at dividend yields of 6.9%, 3.6%, and 4.7%, respectively. The Vanguard High Dividend Yield ETF (VYM) has ~11% exposure to energy sector stocks.

What does TSO’s cash flow analysis suggest?

The slump in refining earnings has impacted Tesoro’s cash flow from operations and cash reserves. If refining earnings don’t improve, Tesoro will likely have to raise fresh debt in order to maintain its capex and shareholder returns. Alternatively, the company will have to cut capex or shareholder returns, or it could use a mixture of both strategies. Tesoro has already cut its capex guidance for 2016. Going forward, the refining environment will be a key factor that will determine Tesoro’s strategy.

Next, let’s look at Tesoro’s valuation trend and why it’s trading lower than historical averages.

In the next part, we’ll look at Tesoro’s valuation trend and why it’s trading lower than historical averages.


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