Is Tesoro’s Leverage Curve Trending Higher?



Tesoro’s leverage compared to its peers

Tesoro’s (TSO) net debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] stood at 2.3x in 1Q17, higher than the average industry leverage ratio of 2.2x. The industry average considers ten American refining companies. This ratio displays a company’s leverage level as a multiple of its earnings.

In 1Q17, TSO’s total debt-to-capital ratio stood at 44%. This ratio also stood above the industry average of 38%. The debt-to-capital ratio shows the percentage of debt in a company’s capital structure.

TSO’s peers Marathon Petroleum (MPC), Valero Energy (VLO), and Phillips 66 (PSX) have total debt-to-capital ratios of 38%, 29%, and 30%, respectively. For further details, please read Refiners’ Leverages in 1Q17: Who’s Best Placed—MPC, TSO, VLO, or PSX?

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Tesoro’s leverage curve: Net debt-to-EBITDA rising

Tesoro’s (TSO) net debt-to-EBITDA ratio rose from 1.3x in 1Q15 to 2.3x in 1Q17. Before analyzing the increase in this ratio, let’s look at the net debt trend.

In 1Q17, Tesoro’s (TSO) net debt rose 18% over 1Q15 to $4.3 billion. Its net debt rose due to a steeper rise in total debt compared to cash.

TSO’s debt rose sharply in the past few quarters due to its growth activities, volatile earnings, and the acquisition of Western Refining (WNR). Tesoro’s total debt and cash stood at $6.6 billion and $2.3 billion in 1Q17, respectively.

Tesoro’s EBITDA fell from 1Q15 to 1Q17 due to the volatile refining environment, leading to lower refining earnings. So, a rise in net debt coupled with a decline in EBITDA resulted in a steep surge in its net debt-to-EBITDA ratio.

What does Tesoro’s leverage analysis suggest?

Tesoro’s (TSO) leverage ratios stand higher than the industry average—not a comfortable situation. Due to its growth plans and volatile refining margin environment, the company has boosted its leverage. Considering Tesoro’s growth strategy, we believe it could be important for the company to control its debt level.

The Western Refining acquisition is expected to benefit Tesoro in the form of operational synergies, higher capacity, and growth in its midstream portfolio. If WNR is successfully integrated and the refining environment improves, Tesoro could see an improvement in its leverage position.


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