Andeavor, previously known as Tesoro, is one of the largest independent petroleum refining, logistics and marketing companies in the US. Having been incorporated in Delaware in 1968, it is currently headquartered in San Antonio, Texas – where it is the only Fortune 500 company that has its headquarters there.
Andeavor’s business is organized into three main operating segments: Refining, Logistics and Marketing.
Andeavor’s refining segment refines crude oil into transportation fuels, such as gasoline, jet fuel and diesel fuel as well as other products including liquified petroleum gas. Oil Refining is the process in which crude oil (the unprocessed oil from beneath the ground) is processed into more useful products, such as diesel fuel or heating oil. This process consists of fractional distillation, where you heat the crude oil up, let it vaporize and then condense the vapor. By doing so, one is exploiting the difference in the boiling temperatures of the various hydrocarbons that make up crude oil.
Andeavor currently owns seven petroleum refineries in the US (2x California, 2x Pacific Northwest, 3x Mid-Continent) with a collective crude oil capacity of 895 million barrels per day. Andeavor purchases its crude oil from domestic markets such as North Dakota, Alaska and California as well as from foreign sources such as South America, the Middle East and western Africa. It transports the purchased oil to its local refineries through several pipelines and tanks, to which Andeavor is leasing access.
Andeavor also owns and operates several transporting facilities under its logistic segment Tesoro Logistics LP (TLLP). TLLP owns and operates several oil pipelines, trucking fleets, rail facilities and terminals with storage capacity for refined products. TLLP generates revenues by charging fees to third parties that require transportation or storage facilities of their oil products.
Finally, Andeavor’s Marketing segment sells diesel fuel and gasoline in the western area of the United States through various channels. Andeavor sells transportation fuels through third party distributors and retail stations that include brands such as Shell, Exxon and Arco.
I found the operating business of Andeavor extremely interesting and therefore decided to perform a comparable companies analysis of Andeavor and its peer group. I obtained the peer group from the “Competition” section of Andeavor’s 10-K form and sourced all of the relevant financial information for the valuation from the respective companies’ annual reports and Yahoo! Finance.
Immediately noticeable is that Andeavor and its peer group are trading extremely close to their 52 week high, which confirms the omnipresent topic of all-time high equity valuations due to the current low interest rate environment. Andeavor, as of the first of January, had the highest stock price among its peers and the second lowest market capitalization with around $18bn.
Also, Andeavor has seen a recent 23% increase in its stock price since Hurricane Harvey hit the Gulf coast on 17th August 2017. Andeavor doesn’t own or operate any refineries on the Gulf coast and therefore benefited from the subsequent spike in gas prices. This sharp increase in the stock price seems to have been overly optimistic – which is why common sentiment is that a minor correction is due in Andeavors share price.
After this minor correction, however, Andeavor is going to be a solid investment. Given it’s highly diversified and integrated portfolio of assets and operations, Andeavor can provide strong growth opportunities across their value chains and is not completely exposed to adverse movements in the oil price. Its Marketing segment has added 544 stations to its branded Network through the acquisition of Western Refining that will further capture margin downstream within the value chain. The Logistics segment maximizes Andeavors overall performance by focusing on fee-based and stable business. This segment effectively acts as a hedge against adverse oil price movements. The Refining segment is efficient, reliable, strategically located and geographically diverse. Andeavor plans to enhance growth in this segment by capturing the synergies associated with the Western Refining acquisition, which are estimated to be around $350 to $425 million annually, investing in major capital projects and maintaining high utilization of its refineries.
While past performance is not necessary indicative for future performance, there seems to be no apparent reason why Andeavor should not continue to outperform the S&P 500 and its peers in the years to come. Andeavors portfolio is highly diversified, their Management team is experienced and strong and they are operating a very shareholder-centric business, which can only be beneficial for investors.