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Tesoro Corporation reports on first quarter performance

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Hydrocarbon Engineering,

Tesoro Corporation reported first quarter net earnings from continuing operations of US$58 million, or US$0.48 per diluted share compared to net earnings from continuing operations of US$145 million, or US$1.15 per diluted share a year ago. First quarter 2016 earnings include a pre-tax charge of US$147 million related to a lower of cost or market (LCM) inventory adjustment, as well as a pre-tax benefit of US$6 million for a legal settlement in Logistics. Earnings for the first quarter of 2015 included a pre-tax benefit of US$42 million related to the LCM adjustment. Excluding these items, earnings from continuing operations for 2016 were US$144 million, or US$1.19 per diluted share and US$124 million or US$0.98 per diluted share in the first quarter of 2015. Adjusted EBITDA for the first quarter of 2016 was US$541 million compared to US$489 million last year.

"Our highly integrated business model allowed us to deliver adjusted earnings growth versus last year in spite of narrow crude oil differentials during the quarter and a weak refining margin environment in February," said Greg Goff, Chairman and CEO. "Looking forward, consumer demand for gasoline remains strong and refining margins improved as the quarter ended, which benefits our outlook for the second quarter."

For the first quarter of 2016, the company recorded segment operating income of US$253 million compared to segment operating income of US$424 million in the first quarter of 2015. Excluding special items in each period, total segment operating income was US$394 million compared to US$395 million last year. First quarter 2016 results reflect strong performance in Marketing and continued growth in Logistics, partially offset by lower refining crack spreads and narrow crude oil differentials.

Excluding the first quarter LCM adjustment for both periods, Refining's operating income was US$47 million in the first quarter of 2016 compared to US$145 million a year ago.

The Tesoro Index was US$12.15 per barrel for the first quarter of 2016 with a realised gross refining margin of US$9.66 per barrel or 80% of the Tesoro Index, compared to a realised gross refining margin of US$11.62 per barrel or 70% of the Tesoro Index of US$16.71 per barrel last year. Capture rates in the quarter were largely impacted by the narrowing of crude oil differentials, particularly the Bakken differentials, which narrowed by over US$4 per barrel relative to WTI and by over US$7 per barrel relative to ANS in the first quarter of 2015.

Total refinery throughput for the quarter was 782 000 bpd, or 89% utilisation. Manufacturing costs in the first quarter of 2016 decreased US$0.78 per barrel over last year to US$5.55 per barrel, due to the higher throughput basis in 2016 compared to 2015, which was impacted by a work stoppage.

Logistics operating income was US$126 million in the first quarter of 2016 compared to US$104 million in the first quarter of 2015. The increase was driven by volume growth in the crude oil gathering business, increased natural gas liquids processing throughput and the acquisition by Tesoro Logistics (TLLP) of the Los Angeles Refinery Storage and Pipeline Assets in fourth quarter of 2015.

Marketing operating income was US$227 million, up substantially from US$133 million a year ago. This segment's performance in the quarter benefited from a favourable market environment, continued high consumer demand in the company's regions and growth in our branded network of retail stations. Its branded retail network in the first quarter of 2016 grew by 178 stations over the same period last year.

Corporate and unallocated costs for the first quarter 2016 were US$74 million. The effective tax rate was 23.4%, primarily due to a benefit of US$13 million, or US$0.11 per diluted share from a change in tax accounting rules for stock-based compensation, as well as the continued growth of TLLP's income in proportion to Tesoro income.

Capital spending and liquidity

Capital spending for the first quarter of 2016 was US$147 million for Tesoro Corporation and US$41 million for TLLP. Turnaround expenditures for the first quarter were US$115 million.

Tesoro ended the first quarter with US$439 million in cash and cash equivalents compared to US$942 million at the end of 2015. The reduction in the cash balance for the quarter largely reflects the purchase of Great Northern Midstream, LLC. Tesoro has US$1.3 billion of availability under the company's revolving credit facility. Excluding TLLP debt and equity, total debt was US$1.2 billion or 19% of total capitalisation at the end of the first quarter of 2016. On a consolidated basis total outstanding debt, net of unamortised issuance costs, was US$4.1 billion.

The company has reduced its 2016 capital spend outlook by approximately US$500 million to approximately US$1 billion. This includes approximately US$700 million in capital for Tesoro and approximately US$300 million in capital for Tesoro Logistics. The reduction for Tesoro is primarily related to the timing on large projects. The reduction for TLLP is due to deferrals of several gathering projects attributed to low commodity prices and the timing of spending related to the Los Angeles Refinery Interconnect Pipeline project.

Tesoro has US$1.4 billion remaining under its previously approved share repurchase programmes. The company did not repurchase shares in the quarter largely due to funding the Great Northern Midstream LLC acquisition that was announced in the fourth quarter 2015. The company remains committed to its financial priorities of investing in high return capital projects, returning cash to shareholders, and maintaining a strong balance sheet.

Tesoro Corporation has announced that the board of directors has approved a regular quarterly dividend of US$0.50 per share payable on 15 June 2016, to all holders of record as of 31 May 2016.

Strategic update

At Tesoro's 2015 Investor and Analyst Day, the company laid out expectations for 2016. These expectations included a Tesoro index of US$12 to US$14 per barrel, marketing segment fuel margins of US$0.11 - US$0.14 per gallon and crude oil differentials reflecting transportation costs. In addition, the company committed to deliver US$400 million to US$500 million of improvements and growth in the logistics business, as well as US$500 million to US$600 million of year-over-year improvement from higher utilisation and operational efficiencies following the labour disruption in 2015.

Through the end of the first quarter of 2016, the Tesoro Index, refining throughout, operational improvements and logistics growth are in line with our expectations. Marketing margins are at the high end of expectations, as fuel volumes continue to grow. However, crude oil differentials are significantly narrower than our expectations and this has resulted in lower capture rates and refining profitability.

In January, Tesoro closed the acquisition of Great Northern Midstream, a crude oil logistics provider which owns and operates a high quality, recently constructed crude oil pipeline, gathering system, transportation, storage and rail loading facilities in the Williston Basin of North Dakota. This transaction provides Tesoro direct access to additional advantaged crude oil for its West Coast refineries and has the potential to reduce supply costs as the Company continues to strengthen its supply position. Additionally, the system provides rateable pipeline volumes that will ultimately benefit Tesoro Logistics once offered to the master limited partnership, which is expected in the second half of 2016.

Regarding the Vancouver Energy project, Washington State's Energy Facility Site Evaluation Council (EFSEC) closed the public comment period in January of 2016. EFSEC is set to begin its adjudicative phase with hearings to be held from 27 June 2016 to 29 July 2016. The company expects a final Environmental Impact Statement to be issued this fall, followed by a recommendation to the Governor of Washington.

Adapted from press release by Rosalie Starling

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