Yahoo Finance How Does Tesoro’s Leverage Compare to Its Peers?
Is Tesoro Evolving into an Integrated Downstream Player?
Tesoro’s leverage
So far in this series, we’ve looked at Tesoro’s (TSO) stock performance, analyst ratings, refining margin outlook, and growth plans. In this part, we’ll look at the company’s leverage position.
Tesoro’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 1x in 1Q16. This is lower than the industry average ratio of 1.3x, which considers 11 refining companies. They include HollyFrontier (HFC), Western Refining (WNR), Marathon Petroleum (MPC), and PBF Energy (PBF). The net debt-to-EBITDA ratio shows a company’s leverage position as a multiple of its earnings.
In 1Q16, TSO’s total debt-to-capital ratio stood at 34.5%. This ratio is lower than the industry average of 35.4%. The debt-to-capital ratio shows a company’s leverage position and capital structure.
Tesoro’s leverage: Net debt-to-EBITDA trend
Tesoro’s (TSO) net debt-to-EBITDA ratio fell from 1.5x in 1Q14 to 1x in 1Q16. Before analyzing the fall in the ratio, let’s understand the net debt trend.
In 1Q16, Tesoro’s (TSO) net debt rose by 78% over 1Q14 to $3.6 billion. Net debt rose sharply in 4Q14 due to a steep rise in total debt following the acquisition of the Rockies natural gas business. The rise in total debt coupled with the fall in cash led to an increase in net debt from 1Q14 to 1Q16. Tesoro’s total debt and cash stood at $4.1 billion and $0.44 billion, respectively, in 1Q16.
EBITDA rose from 1Q14 to 1Q16 on account of higher earnings in TSO’s refining segment. In 2015, Tesoro saw record refining earnings except for the past couple of quarters. So a steeper rise in earnings compared to a rise in net debt from 1Q14 to 1Q16 led to a fall in its net debt-to-EBITDA ratio. For global stock exposure, you could consider the Vanguard Total World Stock ETF (VT).
What does Tesoro’s leverage analysis suggest?
Tesoro’s net debt-to-EBITDA is lower than the industry average, which is a favorable scenario. But considering Tesoro’s growth plans and volatile refining margin environment, the company might have to boost its leverage. In that case, Tesoro would have to ascertain the right limit until it can raise debt without hindering its financial strength. That’s a key factor that investors will want to watch.
Next, let’s see what Tesoro’s cash flow analysis suggests.
Browse this series on Market Realist:
