Tesoro’s Forward Valuations: A Peer Comparison



Peer comparison

In the earlier part of the series, we looked at Tesoro’s (TSO) historical valuation trend. In this part, we’ll look at TSO’s forward valuations compared to its peers.

Before we go ahead with a peer comparison, let’s consider the market cap of American refiners. Tesoro’s (TSO) market cap stands at ~$9 billion. Marathon Petroleum (MPC) and Valero Energy (VLO) have market caps of ~$19 billion and ~$26 billion, respectively. Phillips 66 (PSX) has the highest market cap at ~$41 billion.

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Tesoro’s forward valuations

Tesoro (TSO) is trading at a two-year forward PE (price-to-earnings) ratio of 9.8x, above its peer average of 8.6x. This is similar to Phillips 66 (PSX) and Western Refining (WNR), which are trading above the group average forward PE.

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

Tesoro (TSO) is now trading at a forward EV-to-EBITDA of 5.5x, marginally above its peer average of 5.4x. Most of TSO’s peers are trading closer to the average forward EV-to-EBITDA. Phillips 66 (PSX) and Northern Tier Energy (NTI) are trading far above their averages, at 6.8x and 7.1x forward EV-to-EBITDA, respectively.

Tesoro’s forward PE and EV-to-EBITDA are both above the peer average. This suggests that the Market likely expects the company to perform better than its peers in the scenario of a favorable refining environment.

For exposure to stocks with long-term growth potential, you can consider the iShares Core S&P Total US Stock Market ETF (ITOT). The ETF has ~7% exposure to energy sector stocks.

In the final part of our series, we’ll do a correlation analysis of Tesoro and oil prices.


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