Transformation through Distinctive Performance 2014 Analyst and Investor Day December 10, 2013
Leadership Team Greg Goff President and CEO Scott Keith Brenda Phil Dan Dave Spendlove Casey Peterson Anderson Romasko Kirshner President, SVP, Chief SVP, Strategy Vice President, EVP, SVP, Tesoro Logistics Financial and…
Overview Review 2011 to 2013 performance Provide 2014 to 2016 market outlook Highlight Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial…
Strategic Priorities Operational efficiency and effectiveness Safety and reliability Cost leadership System improvements Commercial excellence Financial discipline Value-driven growth High performing culture Enduring…
2011 2013 Transformation Salt Lake waxy crude oil and Increased supply of capacity/yield project advantaged crude oil Mandan capacity and yield Anacortes unloading facility projects Transformational Los Angeles acquisition,…
Operational Efficiency and Effectiveness Safe Operations Personal Safety Incident Rates OSHA Recordable Rate 0.8 0.5 0.2 3 1 2010 2011 2012 2013 YTD Best In Class Process Safety Incident Rates API Tier 1 and 2 0.7 0.2…
Operational Efficiency and Effectiveness Reliable Operations Significant investment in asset Refinery Availability integrity drives reliability 95% 97% 97% 97% 98% Standardizing maintenance and inspections drives consistent…
Operational Efficiency and Effectiveness Cost Leadership California Refining Improved cost structure by over 1 per Operating Costs1 /bbl barrel in California region 7.19 6.63 Improved maintenance and labor cost 6.30…
Operational Efficiency and Effectiveness System Improvements Highly selective investments that significantly Income Capital and EBITDA strengthen competitive position Generation 1 millions 660 - 670 Anacortes Rail Unloading…
Commercial Excellence Advantaged Feedstocks Optimized Mandan to capture West Coast Crude Oil Inputs1 incremental refinery production Captured incremental value from 17% 26% WTI Based2 waxy crude oil at Salt Lake City 30% 35%…
Commercial Excellence Marketing Achieved targeted marketing integration levels, focused on high- Gasoline Marketing Integration grading marketing portfolio 86% Expand ARCO dealer networks in 74% Southern California 66% 53%…
Financial Discipline Income capital investments over 650 million since 2010 generating over 500 million in annual EBITDA Logistics asset sales to TLLP generated over 2 billion of lower-cost capital Leverage below 30% maintains…
High Performing Culture Strong performance based culture Tesoros Guiding Principles Organization aligned, focused and committed to delivering strategic priorities Strong leadership across entire value chain Compensation system…
Tesoro 2010 Key Metrics 2010 Enterprise Value ( billions) 3.5 Kenai, AK Market Cap ( billions) 2.0 72 MBD Refining Capacity (MBD) 665 Anacortes, WA Refining Complexity 9.8 120 MBD Branded Retail Stations 880 Mandan, ND 58 MBD…
Tesoro Today Key Metrics 2010 2013 Enterprise Value ( billions) 3.5 10.5 Kenai, AK Market Cap ( billions) 2.0 7.8 72 MBD Refining Capacity (MBD) 665 850 Anacortes, WA Refining Complexity 9.8 11.5 120 MBD Branded Retail Stations…
Execution of Strategic Priorities Distinctive Performance: 2014 and 2015 Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline Targeting 370 to 430 million of EBITDA…
Market Outlook - Overview Key Drivers Tesoros View Global Economic Outlook Moderate growth U.S. Economic Outlook 2 2.5% GDP growth Global Refining Capacity Capacity exceeds demand U.S. Refining Utilization High due to low…
Crude Oil Production Growth Key Tesoro Markets Canadian 5,300 Cook Inlet 2,750 3,675 MBD 25 13 15 2008 2013E 2020E 2008 2013E 2020E Bakken 1,250 900 180 2008 2013E 2020E Niobrara/Uinta Total in Key 225 Markets 65…
Tesoro Index /bbl 16 12 8 4 0 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E /bbl 2008-2012 2013 YTD 2014E 2015E 2016E Tesoro Index 10.57 11.50 10 to 12 10 to 12 10 to 12 Market outlook supports full asset…
Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline 31
Key Messages California Synergies Expected synergy contribution increased over 80% Delivering 195 to 215 million in 2014 Developing flexibility to shift 30-40 MBD between gasoline and higher value products California market…
PADD V Fundamentals Gasoline demand expected to 1,600 grow 0 to 0.5% annually through PADD V Gasoline Demand MBD 2016 1,550 Diesel demand expected to grow 1,500 1.0% annually 1,450 Net clean product exports 2008 2010 2012 2014F…
California Regulatory Environment Stationary source emissions Low cost impact Tesoro California CO2 Emissions Millions of Metric Tons Annually 9.5 Fuels under the cap 8.2 7.7 Cost passed to consumers Low Carbon Fuel Standard…
Keys to Distinction on the West Coast Operating cost advantage Flexible yield structure Access to cost-advantaged crude oil Integrated logistics infrastructure Secure and ratable refinery off-take Cost-advantaged regulatory…
Los Angeles Acquisition Summary Los Angeles Acquisition Summary billions Property, Plant and Equipment 1.0 Logistics Asset Sales to TLLP (1.3) Net Investment in R&M Assets (0.3) Working Capital 1.3 Working Capital Reductions…
California Synergy EBITDA 430-490 Annual EBITDA millions 375-415 295-335 195-215 225 250 175 35-40 110 30 2013E 2014E 2015E 2016E 2017E Acquistion Model Current View Feedstock Advantage Production Optimization…
California Synergy Capital Expenditures Los Angeles Refinery Integration Project Optimizes processing capability Provides 30-40 MBD product flexibility Net Capital millions Reduces CO2 emission 500,000 tons 180 160 per year…
Feedstock Advantage millions 2014E 2015E Annual EBITDA 75-80 120-130 Up over 30% versus acquisition premise Enhanced feedstock blending allows full utilization of conversion capacity Replace ANS and foreign crude oil with…
Logistics Optimization millions 2014E 2015E Annual EBITDA 30-35 55-65 Up over 150% versus acquisition premise Shift volumes from third party carriers to Tesoro system Captures octane and blending value associated with…
Production Optimization millions 2014E 2015E Annual EBITDA 60-65 90-100 Up over 110% versus acquisition premise Integration project reduces emissions and increases distillate production flexibility Optimize conversion capacity…
Operating Cost Improvements millions 2014E 2015E Annual EBITDA 30-35 30-40 Up over 125% versus acquisition premise Reliability and mechanical integrity driving improved availability Maintenance and personnel efficiency driving…
Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline 43
Key Messages Uniquely positioned to capitalize on North American advantaged crude oil production Tesoros first rail unloading facility at Anacortes, WA providing significant advantage Developing the capability to move an…
Tesoros Advantaged Feedstock Opportunity Opportunities by Refinery Kenai Currently up to 25% Cook Inlet 72 MBD Potentially up to 67% Cook Inlet and Bakken Martinez 120 MBD Currently up to 45% California Heavy and 70% advantaged…
Benefits from Advantaged Crude Projects Completed advantaged crude projects creating significant value: Anacortes Bakken Crude Oil Anacortes rail unloading facility Advantage Trailing Twelve Months Salt Lake City conversion…
Shifting Domestic Refining Landscape PADD V has yet to realize the full PADD V Crude Oil Supply opportunity for advantaged crude oil Expect PADD III production growth to 43% 39% Foreign saturate local light crude demand ANS 23%…
West Coast Logistics Development Tesoro at forefront of delivering advantaged West Coast Rail PADD V crude oil to West Coast Unloading Capacity2 Supply3 MBD MBD Anacortes Unloading Facility (up to 50MBD) 910 Martinez Rail…
Port of Vancouver Up to 300 MBD Rail-to-Marine Terminal Joint venture with Savage Companies Port of Vancouver advantages Flexibility to deliver to all West Coast refineries Competitive with direct rail cost to California Existing…
Anacortes Yield Comparison Crude Oil Yields ANS Bakken 27% 34% Gasoline 26% 34% Distillate 47% Gas Oil and Residual Oil 32% Bakken crude oil yields 14% to 16% more gasoline and distillate than ANS 51
West Coast Transportation Advantages Tesoro enjoys advantaged waterborne logistics capabilities Access to domestic and foreign cost advantaged crude oil Feedstock optimization across 720 MBD of PADD V refining capacity Flexibility…
West Coast Refining System Opportunity Tesoro Consolidated Tesoro Crude Oil Throughput West Coast Index 11% Foreign Heavy 12% 19% 22% Foreign Light 30% ANS 59% 12% 17% California 19% 17% WTI1 21% 38% 15% 8% 3Q…
Supporting Logistics Projects In Development TLLP Bakken Storage Hub Initial 480,000 barrel capacity Potential two million barrel capacity Enables supply of Bakken to West Coast Under Review Cook Inlet Crude Oil Pipeline Estimated…
Marketing Brands Deploy a premium and value branding strategy within each region New brands allow for site optimization and conversion Leverage Shell, Exxon and Mobil premium brand value to improve marketing channels Leverage…
Marketing Portfolio Optimization Grow dealer and jobber network Enhance convenience store offering Station Count by Brand Optimize real estate 2,265 holdings within each ARCO region 1,402 Exxon/ 1,175 Mobil 880 USA millions…
Driving Gross Margin Capture Leveraging position to drive 300-325 MBD of advantaged crude oil to West Coast Feedstock optimization across Gross Margin Capture Improvement 720 MBD of PADD V refining capacity millions 2014E 2015E…
Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline 58
Key Messages Targeting additional cost efficiencies in the base business Improving supply chain management to reduce costs Improving optimization processes to increase margin capture Institutionalizing best practices through…
Solomon Based Cost Reductions Total Operating Expense Gap (Non-energy)1 /bbl 2010 2011 2012 California 1.70 1.10 0.85 Pacific Northwest NA 0.05 0.30 Mid-Continent 0.30 0.15 1.10 Weighted Average 1.15 0.55 0.75 Captured cost…
Supply Chain Management Increased scale provides greater purchasing power Focusing on materials management and non- hydrocarbon inventories Expanding supplier performance management capabilities Leveraging existing and new supply…
Enhanced Optimization Processes Strengthening optimization further improves gross margin capture across the value chain Enhancing information systems to better respond to rapidly changing market conditions Increased size and scale…
Implementing OEMS Operational Excellence Management Systems Designed to improve health, safety, environment, reliability and profitability EXPEC- TATIONS Capture and consistently implement best practices across the system…
Lean Six-Sigma Techniques Creating organizational capability to deliver improvements across the value chain Approaching fifty percent of employees trained in LSS by 2016 Underpins sustainability of improvement objectives…
Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline 65
Key Messages Developing or acquiring in-bound and out-bound crude oil and product systems Growing logistics to contribute a larger portion of Tesoros business Increasing focus on capturing third-party business Leveraging Tesoro…
TLLP Strategic Drivers Focus on Stable, Fee-based committed businesses Fee-Based Business Maintain stable cash flow Optimize Existing Increase third-party volumes Asset Base Consolidate Tesoro business into TLLP terminals Pursue…
Driving Logistics Growth Tesoro Legacy and Developed Assets Tesoro proceeds from TLLP IPO of 333 million Martinez Marine Terminal for 75 million Long Beach Marine Terminal for 210 million Anacortes Rail Facility for 180 million…
Tesoro Logistics LP Key Metrics Kenai Enterprise Value ( billions) 3.6 Anacortes Market Cap ( billions) 2.8 Crude Oil and Refined 1,570 miles Product Pipelines Mandan High Plains Pipeline 90+ MBD Throughput Salt Lake City High…
TLLP Organic Growth Opportunities Bakken Crude Oil Gathering Expand High Plains System interconnection points Aggregate volumes for Port of Vancouver Develop major Bakken storage hub Expand pipeline gathering network Terminalling,…
Capital Spending TLLP plans to spend about Tesoro Logistics Capital Spend 100 million per year on millions income projects 160 160 Typical project return of 140 15-25% Pursing opportunities to 80 Income expand gathering system…
Value Proposition to Tesoro millions TLLP EBITDA Tesoros Implied Value of TLLP Ownership1 366 2,275 GP 1,250 Holdings 163 750 78 LP Units 2012 2013E 2 2015E 2 2012 2013E 2 2015E 2 Implied value per 5.50 9.25 16.75…
Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline 74
Financial Priorities Maintain a minimum cash balance of 600 to 800 million Target TSO debt to capitalization1 below 30% Solid Operating Results Target TLLP debt at 3x to 4x EBITDA Strategic Strong Growth Return Excess Cash…
Appropriate Leverage for Growth millions TSO1 TLLP2 Consolidated Total Debt 1,666 1,159 2,825 Total Equity 4,415 1,1854 5,600 Debt to Total Capitalization 27% 49% 34% Total Debt to EBITDA3 0.8x 3.9x 1.4x Tesoro leverage in…
Los Angeles Funding Summary Purchase price of 2.3 billion funded with: billion Logistics asset sales to TLLP, net 1.1 Los Angeles working capital reductions 0.2 Redeployment of Hawaii working capital 0.3 Cash on hand 0.3 Interim…
Summary Capital Spending Tesoro Capital Spending1 in millions 790 770 Summary Capital Expenditures 670 millions 2013E 2014E 2015E 2016E Income Maintenance 195 220 245 255 505 Synergy Regulatory 90 190 245 200 Synergy2 15 65…
Sustaining Capital Spending Tesoro Sustaining Capital Spending1 in millions Sustaining capital program 490 455 supports high refinery availability 410 Implementation of Operational Excellence Management Systems Regulatory…
Income Capital Spending Tesoro Income Capital Spending1 in millions Income capital 40% of total capital 315 300 spending from 2013 to 2016 260 Average IRR greater than 30%; simple payback less than 3 years 220 Income Two…
Los Angeles Refinery Integration Project Largest California synergy capital project Project includes1 Improved gasoline/distillate yield flexibility Decommissions Wilmington fluid catalytic cracking unit Reduces CO2 emissions…
Salt Lake City Conversion Project Phase 1 Expanded waxy crude capacity Completed 2Q 2013 Total cost of 175 million Phase 2 Additional expansion of waxy crude capacity up to 22 MBD Increases throughput capacity by 4 MBD Enhances…
Turnaround Spending Tesoro Turnaround Spending in millions 435 400 300 260 270 2012 2013E 2014E 2015E 2016E Lower turnaround spending in 2014 and 2015 Note: 2014 to 2016 includes deferred rebranding costs of 50, 40 and…
Delivering Free Cash Flow Expect to generate approximately Free Cash Flow 1 3.0 billion in free cash flow over in billions next three years 1.1 1.0 0.9 Before potential 1.5 billion of further logistics asset sales to TLLP…
Returning Excess Cash to Shareholders Ordinary Dividends Currently 1 per share annually More than doubled since August 2012 initiation Maintaining competitive dividend yield and payout ratio Percentages Tesoro Peer Avg. 1 Dividend…
Distinctive Performance Objectives Deliver California synergies Enhance gross margin Improve the base Grow logistics Maintain financial discipline 86
Distinctive Performance Objectives Distinctive Performance Objectives million 2014 2015 Deliver California Synergies 160 180 260 300 Enhance gross margin 140 160 250 290 Improve the base 70 90 80 120 Annual EBITDA Improvement1 370…
Delivering Shareholder Value California Synergies Maintain Financial Enhance Gross Margin Discipline Transformation through Distinctive Performance Grow Logistics Improve the Base 88
Non-GAPP Financial Measures EBITDA represents earnings before interest and financing costs, net, interest income, income taxes, and depreciation and amortization expense. We present EBITDA because we believe some investors and…
Non-GAPP Financial Measures (In millions) Unaudited Gross Margin Capture Improvements EBITDA 2014E 2015E Projected net earnings 88 163 Add income tax expense 51 96 Add depreciation and amortization expense 11 11 EBITDA (1) 150…
Non-GAPP Financial Measures (In millions) Unaudited Improve the Base EBITDA 2014E 2015E Projected net earnings 50 63 Add income tax expense 30 37 Add depreciation and amortization expense 0 0 EBITDA (1) 80 100 (In millions)…
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