Point72 Asset Management recently reported a 5.6% passive stake in Tesoro Corporation (TSO: $82). Point72 is run by hedge fund titan Steven Cohen. Cohen has a net worth of $13 billion and regarded on Wall Street as a top investor based on his long term performance track record. This news re-affirms our confidence in owning Tesoro.
Who is Steven Cohen? Steven A. Cohen is the Chairman and Chief Executive Officer of Point72 Asset Management, a 1,000-person family office managing the assets of Cohen and certain eligible employees. Mr. Cohen founded S.A.C. Capital Advisors in 1992 and converted his investment operations to the Point72 Asset Management family office in 2014.
Why have Tesoro shares been doing so poorly? Donald Trump continues to foreshadow a major border adjusted tax (BTA) is coming. This tax will be applied to imported goods from other countries. Since Tesoro imports crude oil from international markets in order to run their refining operations, analysts estimate that a border adjusted tax could negatively impact EPS by 10-15%.
It remains to be seen what exactly Trump will do, but we think there is a good chance the border adjusted tax will be less onerous to Tesoro than current expectations predict. If we see a less onerous BTA regime unfold, this would be a big positive catalyst for Tesoro shares.
Why? If domestic oil prices remained at the same level as imported crude oil prices upon implementation of the BTA, (1) US refiners would have an incentive to consume only domestically produced crude instead of importing crude, since only the cost of domestic crude would be deducted for tax purposes, and (2) US producers would have an incentive to only export crude rather than to sell to domestic refiners, as there would be no taxes on exports. This would lead to a sharp appreciation of the US domestic oil price relative to the global price oil, leading to greater US supply in a global oil market that is already over-supplied. This could be problematic. Goldman Sachs research warns that OPEC would probably raise production further, prolonging the global energy glut. So perhaps Trump can’t do his strict version of BTA in the Energy sector.
Lastly, digging into the details of the fundamentals, we still remain optimistic on the outlook for Tesoro.
Energy is in clear recovery. We print the oil rig count figures for you in our weekly reports. You can see the gradual improvement occurring as production comes back online. Many large energy companies have already provided favorable multi-year outlooks for oil price increases, which is not just words but backed by capital allocation commitments. Specifically, overall capital spending is expected to increase 8% in 2017 for the US industry, but 45% excluding Exxon, Chevron, and Conoco Phillips (that is, within the mid to small cap part of the market). Moreover, the possibilities of Trumpflation could be big for oil, adding a 10-15% lift to pricing by some measures, which would pad the profits of the Energy sector. Â
BMR Take: Tesoro has a net asset value near $120 yet trades at just two-thirds of this level. In comparison, peer Phillips66, with stakeholder Berkshire Hathaway, trades at a premium to net asset value. We think the valuation gap is unwarranted. Re-visit our initiation report on the website for more details about why we like the refining sector, Tesoro specifically, and Tesoro’s recent acquisition of Western Refining.