Taking stock of proposed Vancouver oil terminal

San Antonio, Texas-based Tesoro currently operates six oil refineries in the western United States with a capacity of 850,000 barrels per day. It also operates 2,200 retail gas stations under the Arco, Shell, Exxon, Mobil, USA Gasoline and Tesoro brand names, according to corporate regulatory filings.

The Vancouver terminal’s cost represents about 20 percent of Tesoro’s cash on hand at the end of 2014, according to the company’s quarterly earnings filing with the U.S. Securities and Exchange Commission. And while the oil terminal’s fate roils Vancouver as a community-defining project, its assessment from the distant perch of investors and analysts is all about financial return, not community impact.

The bottom line for investors seems to be that the proposed oil terminal will likely be built eventually, giving Tesoro a healthy boost in revenue for relatively little in capital expenditure. But even if the terminal plan crumbles, Tesoro will find other ways to get the necessary crude to its West Coast refineries, many believe. In other words, the Vancouver project is seen as a nice-to-have but not necessarily a need-to-have asset, said the refineries investment manager.

The oil terminal’s timeline, which started when Tesoro and Savage filed for a permit in August 2013, has already been pushed back by nearly two years beyond initial estimates. Last week, the Washington Energy Facility Site Evaluation Council extended the deadline for completing its review of the project to Nov. 1, and that deadline could be extended again. Originally, Tesoro executives told analysts and investors they hoped to have some oil flowing through the terminal last year.

That was then pushed back to early 2015, then late 2015 and now they acknowledge it could be 2016, depending on the speed of the environmental review. That review includes the release of a draft environmental impact statement and a trial-like adjudication process that will take testimony from supporters and opponents. Then the evaluation council deliberates and makes a recommendation to Washington Gov. Jay Inslee, who has the final say. At that point, though, opponents could still appeal the governor’s decision to the state Supreme Court.

For perspective: the process of review and legal appeals of a controversial proposal to build a wind farm in Skamania County lasted more than four years.

On a recent call to discuss fourth-quarter 2014 earnings with analysts, Tesoro Chief Executive Gregory Goff said Tesoro officials are pleased the evaluation council had begun the adjudication process and are expecting the draft environmental analysis to be released sometime in May.

“It’s not completely black and white as far as specific dates…,” Goff told analysts. “All of the issues and everything that you deal with to get the permit seems to be progressing at a slower pace but progressing well.”

‘Relatively little capital’

Among analysts who cover Tesoro, there seems to be little concern about the status of the oil terminal plan.

According to a Jan. 15 research note written by Morningstar analyst Allen Good, Tesoro’s California refining facilities have been underused thus far in processing crude from the Bakken region. The opening of the oil terminal would boost their production and make Tesoro more competitive, Good said.

“While the facility is facing opposition on environmental and safety concerns, we think it will ultimately be built,” Good wrote. “Once complete, it will afford Tesoro the flexibility to send light or heavy crude to its California refineries … In total, Tesoro expects to move an additional 325 mb/d (325,000 barrels per day) of discount crude to the West Coast by 2016, but the timeline may slip depending on the approval of the terminal in Washington. Regardless, we expect Tesoro’s California refineries eventually should realize higher margins and improved returns through lower feedstock costs and improved yields while expending relatively little capital.”

Brad Heffern, an analyst with RBC Capital Markets, said in a note initiating coverage of Tesoro on Oct. 1 that approval of the oil terminal could boost Tesoro’s stock price by $5 a share or more, and that very little of that benefit was reflected in the price, which at the time was $61.35 per share. RBC Capital markets had a price target of $72 per share, 19 percent above the stock price then, and a rating of “outperform.”

More recently, RBC downgraded its outlook on Tesoro to “sector perform” meaning RBC expects Tesoro’s returns to keep pace with those of other energy sector stocks over the next 12 months.

Tesoro has been a darling among energy sector companies, outperforming the broader Standard & Poor’s 500 stock index and energy peers. Over the trailing 52 weeks ended Feb. 20, Tesoro’s stock price increased 77 percent, closing at $90.58 per share on the New York Stock Exchange. By comparison, the S&P 500 Energy Sector was down 7.12 percent over that same period, while the broader S&P 500 was up about 14 percent.

Moreover, Brent crude oil prices have experienced a year-long slide from $100-plus per barrel to their current $60.10 per barrel. Tesoro’s nearly 80 percent increase in its stock price is a stark contrast to that 40 percent decline in crude oil prices.

Hedge funds, in particular, have been attracted to Tesoro. In the quarter ended Sept. 30, 2014, the most recent period for which data is available, 68 hedge funds staked new positions in Tesoro, and another 109 added Tesoro shares to an existing position, according to a compilation of 13F filings with the Securities and Exchange Commission. The SEC requires investment managers with more than $100 million in assets to file quarterly reports disclosing their holdings. Among other things, managers disclose in these 13F filings the number of shares they own of publicly traded companies. Although the filings are backward-looking and do not contain any data on so-called short positions — bets using borrowed shares that a company’s stock price will fall — 13F filings are seen as an indicator of investor sentiment.

In particular, the filings of some of the more influential hedge funds can give other investors clues about where the “smart money” sees investing opportunities. In the case of Tesoro, hedge funds as of Sept. 30 had bought about a quarter of the company’s shares. The four investment companies with the largest holdings of Tesoro stock in their portfolios are mutual fund firm Vanguard Group (7.3 percent), money manager State Street Corp (5.8 percent), hedge fund D.E. Shaw & Co. Inc. (5.1 percent) and mutual fund giant Fidelity (4.8 percent). Next on the list is Och-Ziff Capital Management, a $46 billion hedge fund, which bought nearly 1.2 million shares in the third quarter. That brought its total holdings of Tesoro shares to 4.8 million, or about 4 percent of all outstanding Tesoro shares.

But some are selling, not buying. D.E. Shaw had owned the second-most Tesoro shares prior to the third quarter, when it sold nearly 2 million shares. In fact, more large institutional investors sold Tesoro shares in the third quarter than bought them, according to an analysis of 13F filings by whalewisdom.com. In the three months ended Sept. 30 of last year, 155 funds sold Tesoro shares and 48 funds sold all of their shares.

‘Creative guys’

Funds reduce positions for any number of reasons, not all of which are tied to sentiment about a particular company. The holding could have performed well enough so that it comprises too much of a fund’s portfolio, necessitating a sale to keep the portfolio properly balanced. Other funds use purely quantitative means to buy and sell shares, and a stock may simply trip some numerical “sell” trigger.

However, Tesoro’s run could be winding down.

Fourth quarter 2014 earnings missed analyst expectations while earnings at Valero Energy, Phillips 66 and Marathon Petroleum exceeded expectations.

Additionally, Tesoro is among the refiners hardest hit by the recent strike by oil workers who are members of the United Steelworkers Union. Three of Tesoro’s West Coast refineries are among the 12 refineries that have seen workers go on strike or vote to strike to protest safety conditions.

The strike, coupled with compelling turnaround prospects at Valero, prompted Goldman Sachs analyst Neil Mehta to downgrade Tesoro to “neutral” from “buy” and to do the reverse for Valero.

The proposed oil terminal doesn’t seem to be registering much of a blip on the radars of analysts or investors, whether they’re buying or selling. And although the project would benefit Tesoro, investors might not care much if it never happens.

The investment manager who invests in refineries compared the oil terminal to the Keystone XL pipeline, which has been the subject of contentious debate while President Barack Obama weighs whether or not to approve it. He said that saga has been playing out for three years, and crude oil is getting to refineries without it.

“I have no doubt that Tesoro and other companies with refineries on the West Coast — they’re already working on finding other ways to get crude to the West Coast,” said the refinery investment manager. “These are creative guys.”

Editor’s note: This story was changed to correct the number of barrels of crude oil that Tesoro expects to move to the West Coast by 2016, and to correct the number of refineries where workers have gone on strike or voted to strike to protest safety conditions.

Chris Clair is a Chicago-based freelance writer who holds a bachelor’s degree in journalism from the University of Portland. He has spent the past 14 years covering the hedge fund industry, first as a reporter for Crain’s Pensions & Investments and most recently at Reuters HedgeWorld. Clair has been a journalist since 1993 in Oregon, New York and Illinois.