Tesoro (TSO)

Yesterday, I appropriated approximately 20 percent(I like making big concentrated bets) to open a position in Tesoro Corporation. It's ironic that its name means treasure in Spanish, at least I hope not. My price was $21.96. Its market cap is 3 billion dollars and I think its intrinsic value is 80 dollars a share. I know that sounds completely outrageous, but just remember Kirk Kerkorian's Tracinda Corp. offered to take a 16 percent additional stake in TSO for 64 dollars a share back in October. I know that was back in October when oil prices weren't as threatening as it is now, but I guess I'm gambling or taking a calculated risk. With the price of oil this high, independent refineries like Tesoro are suffering because they don't have oil operations and the cost of acquiring their products to refine are expensive. My simple thesis is Tesoro is worth this much because it has refining capacity of 650,000 barrels a day. Recently, Valero is in talks to sell some of its assets for 10,000-15,000 dollars per barrel a day capacity. That alone makes Tesoro worth in the neighborhood of 6.5-10 billion dollars. Kuwait is currently building a refinery that got rebudgeted to 12 billion dollars for a 615,000 barrels a day capacity. I also remember from high school projects that I was astounded by the fact that America hasn't built a new refinery since 1976. NIMBY, and the cost of building a refinery prevents more competition domestically. I'm not sure how expensive it'ld be to transport refined oil, but it has to be cheaper to just refine here. If I recall correctly, Monish Pabrai mentioned in his book, Dhando Investor, of his Tesoro holding back in the day in 2001 for about $4.5 a share though. His thesis was that despite being a commodity business, Tesoro holds its refineries in the lucrative West Coast and western US. Gas prices are insane in California and Tesoro holds 1 of 2 refinery on the island of Hawaii.(I know they had problems with that refinery recently, but it'll probably get fixed, right?) No cash flow models from me because I can't predict the future, but Tesoro has had free cash flow 500, 700, and 600 million dollars in 05, 06, and 07. If oil prices hit the 150-200 dollar a barrel that Goldman Sach envisions, I could lose a lot of money with Tesoro, but I can't predict what will happen. Conflicting report at Lehman's which envisions a 80 dollar oil scenario, with Saudi Arabia pumping more oil. (LOL, anylsts know nothing, oil price models are murky everywhere, just think back 5 years ago, today everybody's saying Goldman Sach was genius in subprime business, maybe they were just lucky seeing how someone has to be right in a derivative trade) All I know is that Tesoro is in the business of refining oil and there will always be a demand for that as long as petroleum is such an important part of life. They have great locations in the West Coast, and the market is panicing right now. Fear is overriding, and how can I sit on the sidelines with this. Hopefully, if it continues falling, I'll be able to raise more capital to purchase more shares. I might be jumping in too early even if I'm right, but I guess the mistake of buying then having a stock drop and selling and then having a stock rise is a common value investing mistake. If one thinks it's a mistake. Good news could happen too, oil price drops because of lowering world demand, raising production from Saudi Arabia, production starts in Brazilian fields, oil sand projects increase, Iraq somehow holds free elections and peace reigns there, Hugo Chavez lowers his anti-Americanism, Iran stops seeking nuclear capabilities, a refinery disaster somewhere boosting the margins of the spread, I just don't know. I don't know anything except for my simple thesis that oil refineries have to be worth some money and are essential to unlocking petroleum for everyday use despite being a seemingly commodity.