1. 1
Krause Fund Research
Fall 2015
Energy
Recommendation: HOLD
Analysts
Landon Kowalski
landon-kowalski@uiowa.edu
Matt Loochtan
matthew-loochtan@uiowa.edu
Company Overview
Tesoro Corporation (TSO) is a nation leading refiner
and marketer of petroleum products. Their expertise is
refining crude oil into fuel necessary for transportation,
such as gasoline, jet fuel, diesel fuel, as well as a few
other smaller grade products. Tesoro’s operations
include six refineries across the United States that
produce a combined 850,000 barrels per day. Their
products are sold in 17 states through commercial,
retail, and wholesale avenues. Revenue for the fiscal
year ended December 31st, 2014 was at $40.63 billion,
an increase from $37.6B the year prior.
Stock Performance Highlights
52-week High $116.89
52-week Low $64.16
Beta Value 1.56
Average Daily Volume 2.54 m
Share Highlights
Market Capitalization $13.44 b
Shares Outstanding 1.204 b
Book Value per share $43.84
EPS (as of FYE 12/31/14) $6.94
P/E Ratio 8.65
Dividend Yield 2.17%
Dividend Payout Ratio 14.25%
Company Performance Highlights
ROA 12.40%
ROE 25.74%
Sales $40.61 b
Financial Ratios
Current Ratio 1.63
Debt to Equity 95.64%
Tesoro Corp. (NYSE: TSO)
November 14, 2015
Current Price $111.66
Target Price $120.29
TSO Exhibits Growth Limitations
 Tesoro’s sales have sky rocketed the past couple years,
along with their stock price. Their impressive growth will
not be sustained as they approach their crude oil refining
capacity of 850 mbpd. We forecast much smaller growth for
the years ahead.
 We expect oil prices to make a slow recovery, so the
outlook for the oil refining and marketing industry is not as
strong because costs will increase and profit margins may
decrease.
 Tesoro makes third party purchases of refined products
to meet demand requirements for their retailers. If these
purchases were to increase because they are not able to
produce enough, profit margins would be negatively
impacted.
 We expect an increase in interest rates in December,
which would negatively impact Tesoro because they carry
an above average level of debt for the industry. Financing
costs would increase and we foresee investors reducing
exposure to stocks.
One Year Stock Performance
Source: amigobullsxvii

2. 2
Overview
There are many economic factors that drive the energy
sector, chief among them are crude oil prices and interest
rates. However, within the drivers of crude oil prices are still
more factors such as demand for oil and supply of oil. For
our economic outlook, we have broken down the indicators
that drive crude oil prices and have extensively covered
these “sub-drivers” since the energy sector is essentially
commodity based.
Oil Demand from OECD and Non-OECD Countries
Demand for oil is driven by global economic growth in both
developed countries (OECD) and developing and emerging
countries (Non-OECD). Consequently, world oil demand
has been fairly correlated with Real GDP growth, rising
between 1-2% annually.i
Source: EIAii
Above is a graph charting the consumption of all liquid fuels
(i.e. oil, LNG, gasoline, etc.) against WTI prices and world
GDP growth. Between Non-OECD and OECD countries,
growth in oil demand is strongest in developing and
emerging countries (Non-OECD). These countries tend to
rely extensively on manufacturing versus services and thus
demand more energy for consumption. According to the
Energy Information Administration (EIA), OECD demand
for oil actually declined between 2000 and 2010.ii
However,
growth in oil demand in countries such as China, India, and
Saudi Arabia, as well as other Non-OECD nations increased
by 40% over that period of time.ii
Future growth in world oil demand will likely stem from
these developing nations and have a larger influence on oil
prices over the next few decades. However, when taking
into account China’s lackluster growth and projected
growth rates, oil demand will have to stem from either a
pickup in Chinese growth and/or a shift towards Indochina
countries in the near future. In addition, oil prices will likely
recover at a slower pace for 2015 and 2016 as evidenced by
the EIA estimates provided below. World oil prices are
likely to recover from $41.55 bbl to $49 bbl by the end of
2015 and $51 bbl by 2016.ii
We estimate 2017 and 2018 oil
per barrel prices to be $60 and $70 bbl, respectively,
eventually stabilizing around $75-80 bbl by 2019, with
marginal growth in our CV year of 2020. This recovery will
be driven by a combination of higher demand from these
developing countries and a weakening of supply output in
North America, which will be discussed in the Supply of
OECD and Non-OECD Countries section.
GDP Growth
OECD GDP growth rates have been forecasted at 2%, 2.2%,
and 2.3% for 2015, 2016, and 2017, respectively.iii
The
United States has forecasted GDP growth rates of 2.4%,
2.5%, and 2.4% for the same time period above.iii
We
believe these estimates are reasonable considering the
mature economies of most OECD participants as well as
troubling indicators in regards to deflationary pressure in
Europe and general lackluster growth. For these reasons, we
do not foresee a return to 3.5% GDP growth for at least the
next 5 years, and instead forecast stable GDP growth at
2.75% for our CV year.
We focused on China, India, and Indonesia’s GDP growth
rates since we believe the main sources of oil demand
growth will be derived by these three nations and their
general geographic areas. China’s GDP growth estimates
are 6.8%, 6.5%, and 6.2%, for 2015, 2016, and 2017,
respectively.iii
However, these GDP growth estimates are in
line with the Chinese governments reported forecasts and
we believe that these growth estimates are over-inflated.
Capital Economics, Citibank, Conference Board, and
Lombard Street have put the forward growth rates at about
3.8% to 4.9% for the next 5 years.iv
The declining forecasted
GDP growth rates provide insight into China’s sluggish
demand and are partly responsible for the decline in oil
prices since 2014.
India’s GDP growth rates are forecasted at 7.2%, 7.3%, and
7.4% for the corresponding period above. Indonesia’s GDP
growth rates are estimated at 4.7%, 5.2%, and 5.5% for the
same period.iv
Considering India’s reliance on services over
manufacturing as opposed to China’s economic makeup
favoring manufacturing, India is positioning itself as a
service economy with services making up 57.9% of its
current GDP growth.v
Thus, we agree with the estimates
provided. In regards to Indonesia, their resilient
manufacturing growth will be tested by the coming interest
rate rise by the United States Federal Reserve, but we
believe that the estimates provided have accounted for this
uncertainty in its growth rates.
The much higher growth rates provided by Non-OECD
countries, if realized, will be the main source of world oil
consumption growth moving forward and will likely result
Economic Outlook

3. 3
in a tightening of oil prices since oil prices rise with higher
demand, assuming constant supply.
Oil Output of Non-OPEC and OPEC Countries
Non-OPEC countries can roughly be seen as OECD
countries with the main exceptions being that Russia and
Brazil are not participants in OPEC. Non-OPEC countries
are currently responsible for producing 60% of the world’s
oil production, whereas OPEC is responsible for 40% of
production.vi
Source: EIAii
Above is a graph charting the production of liquid fuels by
Non-OPEC countries against the WTI price of oil. As can
be witnessed by the graph, Non-OPEC production has
increased dramatically in the last 5 years. The main cause
of increase has been the “fracking revolution” in North
America. Once uneconomical, shale and oil plays have now
become accessible through technological advances that
allow unconventional drilling (fracking and oil shale
drilling) to be profitable at estimates averaging at or above
$65 bbl. The massive growth in North American production
has acted as a catalyst for the 43% decline in oil prices since
2014.vii
We believe that higher-cost producing sub-industries, such
as unconventional companies along with off-shore drilling
companies will either slow down production or go bankrupt
due to lack of free cash flows and high long-term debt
payments maturing within the next 2-3 years. In the short-
term, however, many of the North American onshore high-
cost producers have shut down 60% of their drilling rigs
year to date, and have transitioned to low-cost, high-
producing oil plays.viii
Due to this transition, rig usage
declines have yet to cause a significant decrease in oil
production. Thus, we believe oil supplies will largely stay
bloated for the next 2 years, until these firms run into free
cash flow problems.ix
Source: EIAii
OPEC oil production is a different story all together. From
2005 to 2015, OPEC has consistently lost market share to
North American, Latin American, and Russian oil
companies, seeing a decline of 7% from 40% to 33% over
that period.xxi
In an effort to sustain their current market
share, they have decided on a strategy of stable production
growth that is contrary to the usual production cuts that
OPEC would have taken to prop up oil prices in the world
market. This strategy has contributed to the further erosion
of oil prices. We believe that OPEC will continue this
strategy until it is adequately satisfied that high-cost North
American companies will not pose a medium-term threat to
its market share in the future.
Crude Inventories
Crude inventories are an excellent indicator for viewing and
forecasting oil demand and supply in the world. When oil
inventories build up, either a lack of demand or
uneconomical oil prices are usually to blame. In either
event, the market tends to react negatively to upward trends
in crude inventories whereas a decrease in inventories
usually corresponds with growing demand, resulting in
higher oil prices. Unfortunately, for the 2015 year, crude
inventories have been steadily building up. However, since
we have forecasted oil prices to recover largely by 2019,
although not to their peak 2014 levels, crude inventories
should start to decrease moving forward.
Source: EIAii

4. 4
Interest Rates
Interest rates can be a positive or a negative for almost every
sector, especially for the high-capital intensive energy
sector. Most energy companies borrow heavily to both
magnify returns and help fund operations. When interest
rates are low, borrowing costs, or corporate bond yields,
generally drop as a response. Thus, there is a positive
correlation between interest rates and corporate bond yields
as demonstrated by the graph below.
Source: FREDxii
We believe that the Federal Reserve, in light of recent
positive economic data, will more than likely raise interest
rates in late December 2015 from a low of .25%.xiii
We
project the Fed Funds Rate will rise to 1% by the end of
2016, Janet Yellen’s goal, and then about 1% increases per
year to settle at 4% in 2019-2020. The main effect this rate
rise will have on the energy sector is to make refinancing
and further debt issuances more costly for borrowers. As we
have stated, we believe that higher-cost oil producers such
as fracking and tar sand companies will likely go out of
business with higher debt and interest repayments, but an
interest rate rise will act as a catalyst for this event to
happen. When interest rates rise, these companies will have
trouble financing their operations and will subsequently
either have to issue equity, sell off assets, or file for
bankruptcy. In any event, oil production should decrease as
more players leave the industry, which further justifies our
view that oil prices will rise when supply tightens in the next
2-3 years.
Conclusion
After taking into account the demand and supply equations
that are so prominent in understanding what drives crude
prices, and thus, the energy sector, we have concluded that
currently, the market is awash in oil supply and demand
from China is weak. The result: low oil prices. However,
when adjusting our view out 2-3 years, we forecast a pickup
in Chinese and Indochina demand as well as a decline in oil
production, largely stemming from North American output,
to put upward pressure on prices. We believe that these
forecasts and assumptions are reasonable and are generally
in line with the EIA and other analyst estimates.
Overview
Tesoro Corporation operates in the oil, gas, and
consumable fuels industry. More specifically, they are
a part of the oil refining and marketing sub industry,
which focuses primarily on the downstream side of the
energy business.
Recent Developments and Trends
Future Rebound in Oil Prices
As previously mentioned, crude oil supply levels have
been hitting record highs recently with production
outpacing slowing demand. We forecast crude oil prices
to rebound slowly the next five years, which will also
cause revenues to climb back. Given this industry is the
mature stage of its lifecycle; profit margins will most
likely remain fairly stable during this period. However,
there is a chance for profit margins to slightly decline
should the rise in price outpace the rise in demand,
which many industry experts are forecasting to happen.
Lower profits margins will hurt the industry with lower
net incomes and a potential sell off for investors.
Source:IBISWorldxiv
Standards and Regulations
Further revenue growth in this industry is likely to be
hindered by newly enforced regulations by the
Environmental Protection Agency (EPA). They will
require vehicles manufactured after 2016 to have a
higher minimum fuel efficiency of 36 mpg.xiv
These
regulations combined with the fact that more and more
consumers are deciding to purchase hybrid and electric
cars will lead to less demand at the pump.
Markets and Competition
Major integrated oil companies (IOCs) represent the
majority of the refining capacity in the US. These
companies, such as Exxon Mobile and Royal Dutch
Shell, have a competitive advantage with their huge,
customer ready retail segments and wide array of
refineries. However, these IOCs have really struggled
Industry Outlook

5. 5
in other large upstream areas of their business with this
huge drop in oil prices. On the other hand, the
performance and value in refiners have been increasing
as their costs have been very low. This can be seen in
the desirable positive year to date returns in the oil
refining and marketing industry. Going forward, with
oil prices likely to make a smooth recovery, we are not
confident this trend will hold as costs will go back up.
Success within this smaller group of oil refining
specific companies revolves around the ability to have
have a direct sales outlet through a large retail network,
large enough refining capacity to meet demand if
necessary, and low purchase prices of crude to
maximize profit margins.
The major players in this industry and how they
compare are shown in the table below:
Porter’s Five Forces
Threat of New Entrants
The oil and gas refining and marketing industry has
very difficult barriers to entry because of the inability
to build new refineries. Laws are in place restricting
where refineries can be built because they are extremely
undesirable to live near and significantly devalue
property. Companies must compete for the refineries
already in existence, should they need the extra capacity
to grow and fulfill demand requirements.
Threat of Substitutes
The threat lies in emerging alternative sources of energy
as we become more conscious of our impacts on the
environment. The large growth in electrically operated
vehicles and other fuel alternatives has already started
to have an impact on the demand and prices of oil.
Should these substitutes continue to grow at a fast pace,
it could spell trouble for the refining industry.
Power of Suppliers
Given that prices of crude oil are market based,
suppliers have little power over refineries. Refiners will
source out the cheapest price per barrel they could find
to keep costs low. The power is very much in the hands
of the refining companies because they can negotiate
costs and are never committed to one supplier.
Power of Buyers
The power of retailers and wholesalers is moderate to
low, since market prices are the main determinant.
Retailers and wholesalers will search and choose
whichever refiner offers them the cheapest prices;
however, many retailers are owned by refining
companies and, therefore, direct sales outlets.
Rivalry Among Competitors
Competition is very high among companies in this
industry on the basis of price and quality of the product.
They compete to purchase the lowest priced crude
possible from the suppliers in order to be able to charge
lower prices for their final products while maintaining
the same profit margin or greater.xiv
Overview:
Tesoro is a leading refiner and marketer of petroleum
products that has grown substantially the past few years.
Tesoro generates revenue mainly through refining, but
also has transportation and retail segments that assist in
sales. They own six refineries across the United States
that produces a combined 850,000 barrels per day.
Their products are sold in 17 states through commercial,
retail, and wholesale avenues. Revenue for the fiscal
year ended December 31st, 2014 was at $40.63 billion,
an increase from $37.6B the year prior.
Source: Item 1. 10Kxvi
Products
Tesoro refines crude oil to produce four different types
of fuels that are eventually sold to their consumers.
These products are gasoline, jet fuel, diesel fuel, and
heavy fuel oils/residuals and the percentage of total
production for each are shown in the chart below.
Company Analysis

6. 6
Source: Item 1. 10Kxvi
Note: these are 2014 numbers. Each year production can vary
slightly for all segments.
Given gasoline is 49% of Tesoro’s output; a large portion of
their revenues weighs on the sale of this product. It is vital
for gasoline sales to continue to consistently grow into the
future to supply Tesoro with growth in revenues and profits.
Recent Performance
In the third quarter of 2015, Tesoro reported earnings per
share of $6.13 beating the consensus estimates of $6.05. The
lower cost to obtain crude oil and the widening profit
margin drove the higher than expected EPS. Revenues for
the quarter were reported as $7.74 billion, which also came
in higher than the consensus of $7.1 billion, but are down
30.6% from the prior year’s third quarter. The lower
revenues from the year prior were attributable to lower oil
prices. Tesoro capitalized on these lower costs by increasing
their gross margins from 5.59% to 17.96%xv
. The graph
below shows a comparison of five-year cumulative returns
for Tesoro, the S&P 500, and its peer competitors
(Marathon, Phillips, Valero, and HollyFrontier.) The
returns for Tesoro have outpaced its industry competitors by
59% the past 5 years.
Source: 10kxvi
Production
Tesoro purchases their crude and other feedstock from both
domestic and foreign suppliers. As of 2014, oil sourced
from domestic and foreign suppliers are 59% and 41%
respectively2
. As previously mentioned, they refined an
average of 825,000 barrels per day (mbpd) in 2014, just
25,000 below capacity. The two California refineries are
responsible for the largest amount of volume, which was
523 mbpd in 2014. Second is the Pacific Northwest
refineries that refined 171 mbpd total. The mid-continent
refineries produce the least amount with a total of 131
mbpd. The table below shows the gross refining margin
($/Throughput barrel) in 2014 for each region:
California $10.76
Pacific Northwest $10.43
Mid-Continent $23.44
Source: Income Statement 10Kxvi
Many companies like to expand or make their current
refineries more efficient to increase capacity should
capacity limit their growth, such as in Tesoro’s case.
Being that their pacific-northwest refineries currently
have some of the lowest capacities and the largest
profit margin, we believe they will look to increase
capacity should they choose to do so. This margin
would be extremely advantageous leading to large
increases in net income.
Distribution channels
In 2013, Tesoro acquired a logistics company, capitalizing
on the opportunity to significantly cut transportation costs
and provide a more efficient way to distribute their
products. This midstream division, which is now known as
Tesoro Logistics LLC, owns 3,500 miles of pipelines, 28
truck and marine terminals, and over 9 million barrels of
storage capacity. This division provides Tesoro with a huge
competitive advantage because they have a faster, more cost
effective method of delivering their products and increasing
customer satisfaction.
Competition
Tesoro has competition with other major refining
companies like Valero, HollyFrontier Corp, Alon USA
Energy Inc., and Sunoco. With refined barrels per day for
each company at:
Valero 2,900,000
HollyFrontier Corp 443,000
Alon USA 217,000
Sunoco 900,000
Tesoro 850,000
Source: Company’s homepage
Tesoro produces the third highest number of barrels per day
between companies that only focus on refining and
marketing. Producing a smaller amount of barrels per day
for Tesoro will ultimately limit their sales. Areas of concern
for these companies are not just the price per barrel, but the

7. 7
Valuation Analysis
effect of supply and demand. The more consumer demand
the more revenue the companies will bring in.
Brand awareness is a big competitive factor in marketing to
retailers. Volume of production, availability of finished
goods, and ease of transportation to the retailers all affect
competition. Since Tesoro produces less barrels then
Sunoco and Valero, they may lose out on potential deals
with bigger retailers due to lack of supply.
Dividend Payout
Tesoro recently upgraded their dividend to shareholders.
They are paying out $2.00 per share each year with this
updated release, which puts them above the competitors in
payout to investors. Valero pays $1.60 per share,
HollyFrontier pays $1.32 per share, and Alon USA pays
$.60 per share. Tesoro is confident in their ability to keep
generating greater profits and shows appreciation towards
investors believing in them as well.
Competitive advantage
As stated before, Tesoro has their own logistics company
TLLP (Tesoro Logistics) that delivers the refined oil to the
retailers. The revenues that the logistics partner creates are
an extra benefit for Tesoro’s revenue. As of FYE 2014,
TLLP saw $600 million in revenues with $206 million in
operating income, giving Tesoro a boost of about $400
million in realized profits. In general, Tesoro Logistics
charges on a fee-based schedule for gathering, processing,
and transporting crude and refined oil for other companies.
However, with Tesoro having their own partnership, they
are able to save on all the costs usually incurred by their
competitors. By carrying out this method, they try to
channel to the consumer better and cheaper.
Tesoro’s recent expansion into the Basin area of North
Dakota allows them to someday pump the oil out of the
dense oil fields in which the basin area is located. However,
we do not foresee Tesoro making any more big acquisitions
or expansions through 2020, which limits Tesoro from
growing larger.
Catalysts for Growth/Change
If oil prices continue to drop slowly or even keep steady for
a couple years, Tesoro’s value could see a constant increase.
Since Tesoro is a refiner and marketer, the oil prices seems
to have very little affect on the oil prices.
Tesoro’s growth may take a halt this year as their refining
yield is over capacity. The past three years, the yield has
gone up on average 150 thousand barrels per day. But as of
this year, the refining yield cannot get much higher for the
forecasted years to come.
The U.S has many government regulations and public
concerns for the environment and, therefore, it would be
hard to build a new refinery. The only way to continue
growth for Tesoro would be capital spending towards the
increase of capacity.
S.W.O.T Analysis
Strengths
Tesoro has a strong presence in the northwestern part of the
United States while most competitors are in other locations.
Tesoro is also the second largest refinery and marketing
company in the United States.
The recent expansion of logistics into the Bakken Formation
of North Dakota, Montana, and Canada helps to increase the
number of retailers they have readily available. Also, the
expansion increases the revenues from the Logistics
Partnership that they own.
Earnings were unbelievable for Tesoro by more than
doubling net income from the previous year at $224 million
to $586 million.
Weaknesses
Tesoro only produces and ships within the United States,
which limits connections and opportunities around the
world.
Massive increase in growth from the past three years are
going to sustain themselves and level out to a lower than
average rate.
Opportunities
The Refining and Marketing oil companies have become the
only positive trading companies in the oil industry YTD.
This situation is due to the decrease in oil prices that is
lowering revenues and outlooks for other subsectors.
Threats
The recent oil price decrease can eventually have an affect
on the oil industry as a whole, but has yet to cause too much
trouble.
Government regulations are becoming more non-refinery
friendly because of the push for cleaner air and less harm to
our ozone layer and earth.
Summary
We are issuing a HOLD rating for Tesoro after
reviewing the results from our model. We used methods
such as enterprise DCF, economic profit, relative
valuation, and the dividend discount model to value
Tesoro. We calculated a price target of $120, which is
only 7.8% shy of where it is trading now, so it doesn’t

8. 8
Sensitivity Analysis
provide much room for profits. In essence, the most
significant factors of our model are the sales/revenue
forecasts, the forecasts for profit margins,
Revenue Decomposition
Tesoro’s revenues are decomposed into the following
three segments: refining, transportation, and retail. The
refining segment is responsible for approximately
93.8% of all revenues when taking into account
intersegment sales. The major growth limitation is
Tesoro’s refining capacity. Unless they are able to
acquire more refineries, which we cannot predict, their
growth will be extremely limited to non-existent.
Refining throughput for 2014 was only 25,000 barrels
of crude oil per day below their capacity, so our forecast
shows little growth. Operating at full capacity day in
and day out is not realistic due to unforeseeable
circumstances, so we had to take that into consideration
as well.
Product sales growth could still outpace changes in
production if Tesoro decides to increase third party
purchases to meet demand requirements. Although the
boost in the products sales leads to higher revenues,
these sales would be on lower profit margins providing
Tesoro with miniscule increases to net income or even
decreases.
WACC
We calculated Tesoro’s WACC to be 6.94%. We used the
yield to maturity on the 30-year U.S. Treasury bond to
calculate our risk free rate at 2.9%. Also used the U.S.
geometrical average as the market risk premium of
4.62%. Tesoro’s beta was calculated by averaging different
time frames, and averaged 1.168. This high beta means
Tesoro is more volatile than the actual market. With this
information we were able to calculate the cost of equity and
cost of debt of 8.3% and 3.9% respectively from our CAPM
model.
DCF/EP Model
We believe the DCF model delivers the most accurate
estimates for our intrinsic price value because of our
changing FCF, and our small CV growth rate. We chose a
growth rate of 0.5% after 2020 due to the mature lifecycle
that the oil refineries are in.
The DCF model produced an intrinsic price per share value
of $120.35. We have strong beliefs that Tesoro should trade
at this price due to positive FCF on hand. After FYE 2017
we expect a positive return on FCF due to a strong increase
in invested capital.
Relative Valuation Models
We chose to include smaller direct competitors to Tesoro
that had similar EPS or P/E ratio for 2015. The average P/E
ratio for its competitors in 2015 and 2016 came to be $14.4
and $15.3, respectively. While in the same years Tesoro
produced P/E ratios of $13.1 and $28.3, respectively. Due
to drop in EPS for 2016 by 54% or $4.56 the outlook for
relative P/E in 2016 is substantially increased. All the
calculations came out to an intrinsic price of $122.40. It
shows that Tesoro trades at a premium compared to other
companies in the forecasted model.
DDM Model
The DDM model came up with a little bit lower price than
the other models had given us, at an adjusted price of
$96.96, on November 15,2015. This number was mainly
based on our ROE of 13.55% and our CV EPS of $10. This
model expects dividends to keep increasing through CV
date due to the consistent increase Tesoro has had in
dividends each year. It is still difficult to predict future
dividends, therefore, predicting future price using this
model can still be unclear.
Sensitivity analysis becomes an important part of
valuation with the DCF/EP model due to the nature of
small changes having big affects on a company’s value.
CV ROIC vs. WACC
Since we use the DCF model to ultimately make our
decision about our intrinsic price it is important to
understand how each variable can affect our price.
These two are important in estimating our future cash
flows. A 1% increase in the WACC will lead to an
increase in price of $17.59, or 15% of the original value.
However, a decrease by the same percent leads to a
decrease in price of $15.12, or 13%. When the ROIC
changes in our table it has a less of affect in a price
change. With 1 percent change higher and lower the
equivalent price change becomes 0.5% and -0.07%
respectively. The ROIC is reliant on the consistency of
a company’s NOPLAT and beginning invested Capital.
If NOPLAT continues to rise as beginning invested
capital lowers, the chain affect is a higher ROIC and a
more valued company. Tesoro is expected to increase
their value due to the predicted CV ROIC to stay above
the WACC for the upcoming years.

9. 9
Beta vs. Market risk Premium
The beta and market risk premium table shows how
companies fluctuate based on relativity to the market
and common risk rates. If Tesoro were to be completely
correlated with the market it would have an increased
stock price. Also the higher market risk premium is the
lower the stock price would be and vice versa for lower
risk premium. With each decrease in beta of .1 the stock
seems to increase to 7%. This is due to less risk
associated with higher correlation in market risk. Since
Tesoro on average has beaten the S&P for yearly
returns, the risk associated with Tesoro is at a premium
from that of the S&P.
CV growth of EPS vs. Cost of Debt
Due to the already use of maximum capacity that
Tesoro has in 2014, this restricts more growth than
at the present time. Having predicted a lower
growth rate for EPS has a big affect on intrinsic
stock price. Increasing the CV growth rate by 150
basis points would grow the intrinsic stock $18.63
higher. This affects our DCF model intuitively due
to the more growth a company has the higher it
would be valued at. Cost of debt is a big factor in
increasing and decreasing the WACC. With an
increase in 50 basis points of cost of debt our stock
price decreases by 2.5% and a decrease of the same
number increases price by 2.6%.
Market Risk Premium vs. Risk Free Rate
With Interest rates at record lows right now, the
correlated risk free rate is also very low. But as the
Fed talks about hiking interest within the next year
it is imperative for the risk free rate to increase as
well. Due to a high debt to equity ratio that Tesoro
takes on the interest rate spike would have a
daunting affect on its earnings. Either they have to
lower their D/E or the interest rates are going to
lower the intrinsic price of the company. The rate
increase will deliberately lower our valuation price
because of the 95.64% of D/E that Tesoro utilizes.
WACC
$120.29 5.53% 6.03% 6.53% 7.03% 7.53% 8.03% 8.53% 9.03%
8.74% 181.08$ 156.23$ 135.56$ 118.10$ 103.18$ 90.28$ 79.03$ 69.13$
9.24% 181.80$ 156.87$ 136.13$ 118.62$ 103.65$ 90.71$ 79.42$ 69.49$
9.74% 182.45$ 157.44$ 136.64$ 119.08$ 104.07$ 91.09$ 79.77$ 69.82$
10.24% 183.03$ 157.96$ 137.11$ 119.50$ 104.45$ 91.44$ 80.09$ 70.11$
10.74% 183.56$ 158.43$ 137.53$ 119.88$ 104.79$ 91.75$ 80.38$ 70.37$
11.24% 184.04$ 158.85$ 137.91$ 120.22$ 105.10$ 92.04$ 80.64$ 70.61$
11.74% 184.48$ 159.24$ 138.26$ 120.54$ 105.39$ 92.30$ 80.88$ 70.83$
12.24% 184.88$ 159.60$ 138.58$ 120.83$ 105.65$ 92.54$ 81.10$ 71.03$
12.74% 185.25$ 159.93$ 138.87$ 121.10$ 105.90$ 92.76$ 81.30$ 71.22$
13.24% 185.60$ 160.24$ 139.15$ 121.34$ 106.12$ 92.96$ 81.49$ 71.39$
13.74% 185.91$ 160.52$ 139.40$ 121.57$ 106.33$ 93.15$ 81.66$ 71.55$
CV ROIC
Beta
120.29 0.668 0.768 0.868 0.968 1.068 1.168 1.268 1.368 1.468
3.42% 224.48 208.11 193.40 180.10 168.01 156.98 146.87 137.57 128.98
3.82% 211.54 194.83 179.90 166.49 154.38 143.37 133.34 124.14 115.69
4.22% 199.65 182.70 167.66 154.22 142.14 131.22 121.29 112.24 103.94
4.62% 188.68 171.58 156.50 143.09 131.09 120.29 110.51 101.61 93.48
5.02% 178.52 161.35 146.28 132.95 121.06 110.40 100.78 92.05 84.10
5.42% 169.09 151.90 136.89 123.66 111.92 101.42 91.97 83.42 75.64
5.82% 160.32 143.15 128.23 115.14 103.55 93.21 83.94 75.57 67.98
6.22% 152.13 135.03 120.22 107.28 95.85 85.70 76.60 68.41 60.99
Market Risk Premium
CV growth of EPS
120.29 ‐1.50% ‐1% ‐0.50% 0% 0.50% 1% 1.50% 2% 2.50%
3% 120.10 124.15 128.79 134.16 140.42 147.84 156.77 167.71 181.43
4% 114.96 118.62 122.79 127.58 133.17 139.74 147.59 157.13 168.98
5% 110.15 113.45 117.20 121.50 126.47 132.30 139.23 147.58 157.87
6% 105.63 108.61 111.99 115.84 120.29 125.47 131.59 138.92 147.88
7% 101.38 104.07 107.11 110.57 114.54 119.15 124.57 131.02 138.84
8% 97.37 99.80 102.53 105.63 109.19 113.29 118.10 123.78 130.63
9% 93.57 95.76 98.22 101.01 104.19 107.85 112.11 117.13 123.13
Cost of Debt
Risk Free Rate
120.29 2.50% 2.60% 2.70% 2.80% 2.90% 3.00% 3.10% 3.20% 3.30%
3.42% 169.98 166.60 163.31 160.10 156.98 153.93 150.96 148.06 145.24
3.82% 154.92 151.93 149.01 146.16 143.37 140.66 138.01 135.42 132.89
4.22% 141.54 138.87 136.26 133.71 131.22 128.78 126.40 124.07 121.79
4.62% 129.57 127.17 124.83 122.53 120.29 118.09 115.93 113.83 111.76
5.02% 118.80 116.64 114.51 112.44 110.40 108.41 106.45 104.54 102.66
5.42% 109.06 107.09 105.16 103.27 101.42 99.60 97.82 96.07 94.35
5.82% 100.19 98.40 96.64 94.91 93.21 91.55 89.92 88.31 86.74
6.22% 92.09 90.45 88.84 87.25 85.70 84.17 82.66 81.19 79.74
Market risk Premium

10. 10
Important Disclaimer
This report was created by students enrolled in the
Security Analysis (6F:112) class at the University of
Iowa. The report was originally created to offer an
internal investment recommendation for the University
of Iowa Krause Fund and its advisory board. The report
also provides potential employers and other interested
parties an example of the students’ skills, knowledge and
abilities. Members of the Krause Fund are not registered
investment advisors, brokers or officially licensed
financial professionals. The investment advice contained
in this report does not represent an offer or solicitation
to buy or sell any of the securities mentioned. Unless
otherwise noted, facts and figures included in this report
are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa,
its faculty, staff, students, or the Krause Fund may hold
a financial interest in the companies mentioned in this
report.

11. 11
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from http://www.oecd.org/
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http://www.wsj.com/articles/chinas-true-growth-is-a-
mysteryeconomists-weigh-the-clues-1430071125
v Central Intelligence Agency. (2014). In The World
Factbook. Retrieved from
https://www.cia.gov/library/publications/the-world-
factbook.html
vi U.S. Energy Information Administration - EIA -
Independent Statistics and Analysis. (n.d.). Retrieved
November 15, 2015, from
http://www.eia.gov/finance/markets/supply-opec.cfm
vii Tully, S. (2015, January 9). The shale oil revolution
is in danger. Retrieved November 15, 2015, from
http://fortune.com/2015/01/09/oil-prices-shale-
fracking/
viii U.S. Rig Count. (n.d.). Retrieved November 15,
2015, from http://www.aogr.com/web-exclusives/us-
rig-count/2015
ix Helman, C. (2015, February 13). Oil Rig Count
Continues To Plunge, Down 30 Percent From
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http://www.forbes.com/sites/christopherhelman/2015/0
2/13/oil-rig-count-continues-plunge-down-30-percent-
from-november/
x OPEC's perspective on the world oil market. (2005,
November 2). Retrieved November 15, 2015, from
http://www.opec.org/opec_web/en/882.htm
xi Confidential OPEC report sOilfield Services market
share squeeze. (2015, November 4). Retrieved
November 15, 2015, from
http://www.cnbc.com/2015/11/04/opec-confidential-
report-sOilfield Services-market-share-squeeze-to-
2019.html
xii Board of Governors of the Federal Reserve System
(US), Moody's Seasoned Aaa Corporate Bond Yield©
[AAA], retrieved from FRED, Federal Reserve Bank of
St. Louis
https://research.stlouisfed.org/fred2/series/AAA/,
November 14, 2015.
xiii FED Federal Funds Rate, American central bank's
interest rate. (n.d.). Retrieved November 15, 2015, from
http://www.global-rates.com/interest-rates/central-
banks/central-bank-america/fed-interest-rate.aspx
xiv “industry Research Reports." Industry Research
Reports. Web. 17 Nov. 2015. IBISWorld.com.Industry-
research
xv Capitalcube Tesoro-corp-earnings-q3-2015/
Web. 17 Nov. 2015
http://www.capitalcube.com/blog/index.php/tesoro-
corp-earnings-q3-2015/
xvi Tesoro 10K
xvii "Tesoro Stock Charts (NYSE:TSO)." Tesoro
Stock Charts, NYSE:TSO Interactive Stock Chart.
Amigobulls. Web. 17 Nov. 2015.
http://amigobulls.com/stocks/TSO/stockcharts

12. Revenue Decomposition
Tesoro Corporation
In millions
Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Refining Throughput (capacity= 850 mbpd) 517 697 825 829 846 833 837 841 846
Total Product Sales (mbpd)
Gasoline 328 343 429 507 512 522 507 512 517 512
Diesel Fuel 130 141 176 206 207 209 207 209 213 220
Jet Fuel 71 76 117 149 152 155 149 154 151 145
Heavy Fuel Oils, Residual Products, and Other 63 67 86 87 87 87 89 89 89 88
Total Sales 592 627 808 949 958 973 951 964 970 964
Product Sales Growth (mbpd)
Gasoline 4.57% 25.07% 18.18% 1.00% 2.00% ‐3.00% 1.00% 1.00% ‐1.00%
Diesel Fuel 8.46% 24.82% 17.05% 0.50% 1.00% ‐1.00% 1.00% 2.00% 3.00%
Jet Fuel 7.04% 53.95% 27.35% 2.00% 2.00% ‐4.00% 3.40% ‐2.00% ‐4.00%
Heavy Fuel Oils, Residual Products, and Other 6.35% 28.36% 1.16% ‐0.50% 0.50% 2.00% 0.50% 0.00% ‐1.00%
Total Sales 5.91% 28.87% 17.45% 0.91% 1.65% ‐2.28% 1.33% 0.65% ‐0.59%
Refined Product Sales Margin ($/barrel)
Average Sales Price $123.64 $118.40 $112.17 $72.00 $64.00 $75.00 $81.00 $86.00 $92.00
Average Cost of Sales $110.94 $109.64 $102.59 $63.00 $54.50 $65.00 $70.00 $74.00 $80.00
Sales Margin $12.70 $8.76 $9.58 $9.00 $9.50 $10.00 $11.00 $12.00 $12.00
Revenues (in millions)
Crude Oil Resales $890 $1,969 $1,456 $961 $869 $995 $1,089 $1,163 $1,237
TLLP, net of intersegment sales $14 $40 $103 $140 $151 $163 $180 $192 $215
Retail, net of intersegment sales 595 626 958 $802 $872 $867 $792 $849 $975
Other Revenues 1499 2635 2517 1903 1892 2025 2061 2204 2427
Refining Revenues (sales x avg sales price x 365) 28296 34919 38854 25167 22739 26039 28496 30450 32383
Total Revenues(Other Revenues+Refining Revenues) 29837 37597 40629 27,070 24,631 28,064 30,557 32,655 34,811

13. Income Statement
Tesoro Corporation
In millions
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Revenue
Refined Products 28,296 34,919 38,854 25,167 22,739 26,039 28,496 30,450 32,383
Other Revenues 1,499 2,635 2,517 1,903 1,892 2,025 2,061 2,204 2,427
Total Revenues 32,961 37,612 40,607 27,070 24,631 28,064 30,557 32,655 34,811
Costs & Expenses
COGS excluding D&A 30,505 35,884 38,549 24,363 22,907 26,100 28,112 29,716 31,678
Depreciation & Amortization Expense 445 489 562 556 587 619 649 704 748
Depreciation 295 322 363 366 385 404 424 445 468
Amortization of Intangibles 12 13 17 15 12 14 12 15 18
Amortization of Deferred Charges 138 154 182 175 190 201 213 244 262
SG&A Expense 297 275 323 271 246 281 306 327 348
Total Costs & Expenses 31,247 36,648 39,434 25,190 23,740 26,999 29,067 30,747 32,774
Operating Income 1,714 964 1,173 1,880 891 1,065 1,490 1,908 2,037
Other Expenses
Interest Expense 165 151 235 255 143 169 181 191 203
Unusual Expense ‐ Net 297 136 (502) ‐ ‐ ‐ ‐ ‐ ‐
Total Other Expenses 422 290 (243) 255 143 169 181 191 203
Pretax Income 1,212 680 1,416 1,625 748 896 1,308 1,717 1,834
Income Taxes 442 246 547 569 262 314 458 601 642
Minority Interest 27 42 45 47 50 51 52 54 54
Net Income 743 392 872 1,009 436 531 798 1,062 1,138
Shares Outstanding 137 132 126 121 117 117 116 115 114
Earnings Per Share 5.41$ 2.97$ 6.94$ 8.31$ 3.72$ 4.56$ 6.90$ 9.26$ 10.00$
Dividends per share 0.27$ 0.90$ 1.10$ 1.70$ 2.00$ 2.20$ 2.40$ 3.20$ 3.60$

14. Balance Sheet
Tesoro Corporation
In millions
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Assets
Current Assets
Cash & Short‐Term Investments 1,639 1,238 1,000 731 665 758 825 882 940
Receivables, less allowance for doubtful accounts 1,221 1,313 1,435 758 788 842 1,069 1,110 1,288
Inventories 1,578 2,565 2,439 1,624 1,576 1,880 1,803 2,025 2,228
Prepayments and other current assets ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Total Current Assets 4,636 5,326 5,074 3,113 3,030 3,480 3,697 4,017 4,456
Property, Plant & Equipment
Property, Plant & Equipment, at cost 7,257 9,123 11,633 12,215 12,825 13,467 14,140 14,847 15,589
Accumulated Depreciation 2,012 2,248 2,588 2,687 2,822 2,963 3,111 3,266 3,430
Net Property, Plant & Equipment 5,245 6,875 9,045 9,527 10,004 10,504 11,029 11,581 12,160
Other Noncurrent Assets
Acquired Intangibles, net 214 263 1,222 262 212 240 244 281 278
Other, net 607 925 1,243 821 817 895 963 1,041 1,082
Total Other Noncurrent Assets 821 1,188 2,465 1,083 1,029 1,135 1,207 1,322 1,360
Total Assets 10,702 13,389 16,584 13,723 14,062 15,119 15,933 16,919 17,975
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable 2,213 2,596 2,470 1,895 1,724 1,403 1,222 2,612 1,741
Other Current Liabilities 668 812 996 636 579 842 718 767 1,044
Total Current Liabilities 2,881 3,408 3,466 2,531 2,303 2,245 1,940 3,380 2,785
Deferred Income Taxes 850 1,018 1,098 1,345 1,015 939 987 984 1,191
Other Noncurrent Liabilities 647 655 790 631 574 842 917 761 1,044
Long‐Term Debt 1,587 2,823 4,254 2,745 2,812 3,024 3,187 3,384 3,595
Total Liabilities 5,965 7,904 9,608 7252 6,705 7,049 7,031 8,509 8,615
Shareholders' Equity
Common Equity 1095 1212 1281 1,288 1,295 1,302 1,303 1,303 1,303
Retained Earnings 3649 3940 4642 5,445 5,632 5,907 6,428 7,122 7,851
Treasury Stock (356) (798) (1,320) (1,820) (2,320) (2,456) (2,592) (2,728) (2,864)
Other Appropriated Reserves (137) (52) (149) (109) (109) (109) (109) (109) (109)
Total Shareholders' Equity 4251 4302 4454 4,803 4,498 4,644 5,029 5,588 6,180
Noncontrolling Interest 486 1183 2522 1668 2860 3426 3873 2822 3179
Total Equity 4737 5485 6976 6,470 7,355 8,065 8,895 8,399 9,344
Total Liabilities & Shareholders' Equity 10702 13389 16584 13,723 14,062 15,119 15,933 16,919 17,975

15. Cash Flow Statement
Tesoro Corporation
In millions
Fiscal Years Ending Dec. 31 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Earnings 507 801 566 278 (140) (29) 563 770 454 888
Depreciation, Depletion & Amortization 186 247 357 401 426 422 417 445 490 562
Deferred Taxes & Investment Tax Credit 77 105 (1) 89 95 9 200 (8) 166 246
Other Funds 26 (40) (1) 95 37 (8) 3 105 (451) (146)
Receivables (190) (143) (360) 410 (387) 208 (365) 48 36 10
Inventories (338) 81 (50) 413 165 (635) (506) 192 (311) 149
Accounts Payable 510 92 845 (998) 450 452 448 (61) 518 (298)
Other Assets/Liabilities (20) (4) (34) 28 17 (34) (71) 94 (43) (47)
Net Operating Cash Flow 758 1,139 1,322 716 663 385 689 1,585 859 1,364
Investing Activities
Capital Expenditures (258) (436) (747) (650) (437) (297) (298) (529) (570) (685)
Acquisitions 0 0 (2,105) 0 0 0 0 (40) (2,237) (2,496)
Sale of Fixed Assets & Businesses 4 6 14 40 1 2 7 0 539 0
Other Investing Activities 0 0 0 0 0 0 0 3 6 9
Net Investing Cash Flow (254) (430) (2,838) (610) (436) (295) (291) (696) (2,577) (3,172)
Financing Activities
Proceeds from Stock Options 30 12 9 5 4 5 12 0 72 19
Proceeds from Sale of Stock 0 0 0 0 0 0 288 205 702 949
Repurchase of Common & Preferred Stk. (15) (151) (4) (5) (2) (2) (101) (131) (446) (500)
Cash Dividends Paid (14) (27) (48) (55) (49) 0 0 (38) (121) (141)
Issuance of Long-Term Debt 890 0 1,754 5,658 700 216 312 1,436 3,361 2,222
Payments on Long-Term Debt (1,091) (12) (1,156) (5,714) (486) (69) (624) (1,577) (2,174) (820)
Other Uses (76) (2) (12) (1) (3) (8) (46) (53) (89) (179)
Excess Tax Benefits 27 17 10 3 2 3 13 8 12 20
Net Financing Cash Flow (249) (163) 553 (109) 166 145 (146) (150) 1,317 1,570
Net Change in Cash 255 546 (963) (3) 393 235 252 739 (401) (238)
Cash Beginning of Year 440 986 23 20 413 648 900 1,639 1238
Cash End of Year 440 986 23 20 413 648 900 1,639 1,238 1,000
Operating Activities

16. Forecast Cash Flow Statement
Tesoro Corporation
In millions
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
Cash Flows from Operating Activities
Net income 1,009 422 531 798 1,062 1,138
Adjustments for Non‐Cash Operating Expenses
Depreciation & Amortization 556 587 619 649 704 748
Change in working capital
Less: Increase to Receivables (677) 30 54 228 41 178
Less: Increase in Inventories (815) (48) 304 (77) 222 203
Less: increase in Prepayments 0 0 0 0 0 0
Increase in Accounts Payable (575) (171) (321) (181) 1,390 (872)
Increase in Other Current Liabilities (360) (57) 263 (124) 49 277
Increase in Deferred taxes 247 (330) (77) 48 (3) 207
Increase in Other Noncurrent Liabilities (159) (57) 268 75 (156) 283
Net cash flows provided by operating activitie 2,210 412 926 1,116 2,785 1,400
Cash Flows from Investing Activities
Increase in Short Term investments (269) (66) 93 67 57 58
Capital Expenditures (215) (226) (237) (249) (262) (1,210)
Other Assets (422) (4) 78 68 78 41
Net Cash used for Investing Activities (907) (296) (66) (114) (126) (1,111)
Cash Flows from Financing Activities
Payment of dividends 206 235 257 278 367 410
Proceeds from issuance of common stock 7 7 7 1 0 0
Repurchases of Common Stock (500) (500) (136) (136) (136) (136)
Change in Long-Term Debt (1,509) 68 211 163 197 211
Net cash provided by financing activities (1,796) (190) 339 305 428 485
Net increase(decrease) in cash (492) (74) 1,199 1,307 3,087 774
Cash Beginning of Year 1,000 508 434 1,633 2,940 6,027
Cash End of Year 508 434 1,633 2,940 6,027 6,801

17. Common Size Income Statement
Tesoro Corporation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Revenue
Refined Products 85.85% 92.84% 95.68% 92.97% 92.32% 92.78% 93.26% 93.25% 93.03%
Other Revenues 14.15% 7.16% 4.32% 7.03% 7.68% 7.22% 6.74% 6.75% 6.97%
Total Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100%
Costs & Expenses
COGS excluding D&A 92.55% 95.41% 94.93% 90.00% 93.00% 93.00% 92.00% 91.00% 91.00%
Depreciation & Amortization Expense 1.35% 1.30% 1.38% 2.06% 2.38% 2.21% 2.12% 2.16% 2.15%
Depreciation 0.89% 0.86% 0.89% 1.35% 1.56% 1.44% 1.39% 1.36% 1.34%
Amortization of Intangibles 0.04% 0.03% 0.04% 0.06% 0.05% 0.05% 0.04% 0.05% 0.05%
Amortization of Deferred Charges 0.42% 0.41% 0.45% 0.65% 0.77% 0.72% 0.70% 0.75% 0.75%
SG&A Expense 0.90% 0.73% 0.80% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Total Costs & Expenses 94.80% 97.44% 97.11% 93.06% 96.38% 96.21% 95.12% 94.16% 94.15%
Operating Income 5.20% 2.56% 2.89% 6.94% 3.62% 3.79% 4.88% 5.84% 5.85%
Other Expenses
Interest Expense 0.50% 0.40% 0.58% 0.94% 0.58% 0.60% 0.59% 0.59% 0.58%
Unusual Expense ‐ Net 0.90% 0.36% ‐1.24% ‐ ‐ ‐ ‐ ‐ ‐
Total Other Expenses 1.28% 0.77% ‐0.60% 0.94% 0.58% 0.60% 0.59% 0.59% 0.58%
Pretax Income 3.68% 1.81% 3.49% 6.00% 3.04% 3.19% 4.28% 5.26% 5.27%
Income Taxes 1.34% 0.65% 1.35% 2.10% 1.06% 1.12% 1.50% 1.84% 1.84%
Minority Interest 0.08% 0.11% 0.11% 0.17% 0.20% 0.18% 0.17% 0.17% 0.16%
Net Income 2.25% 1.04% 2.15% 3.73% 1.77% 1.89% 2.61% 3.25% 3.27%
Shares Outstanding 137 132 126 121 117 117 116 115 114
Earnings Per Share 5.41 2.97 6.94 8.31 3.72 4.56 6.90 9.26 10.00
Dividends per share 0.27 0.90 1.10 1.70 2.00 2.20 2.40 3.20 3.60

18. Common Size Balance Sheet
Tesoro Corporation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Assets
Current Assets
Cash & Short‐Term Investments 4.97% 3.29% 2.46% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70%
Receivables, less allowance for doubtful accounts 3.70% 3.49% 3.53% 2.80% 3.20% 3.00% 3.50% 3.40% 3.70%
Inventories 4.79% 6.82% 6.01% 6.00% 6.40% 6.70% 5.90% 6.20% 6.40%
Prepayments and other current assets ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Total Current Assets 14.07% 14.16% 12.50% 11.50% 12.30% 12.40% 12.10% 12.30% 12.80%
Property, Plant & Equipment
Property, Plant & Equipment, at cost 22.02% 24.26% 28.65% 45.12% 52.07% 47.99% 46.27% 45.47% 44.78%
Accumulated Depreciation 6.10% 5.98% 6.37% 9.93% 11.46% 10.56% 10.18% 10.00% 9.85%
Net Property, Plant & Equipment 15.91% 18.28% 22.27% 35.20% 40.61% 37.43% 36.09% 35.46% 34.93%
Other Noncurrent Assets
Acquired Intangibles, net 0.65% 0.70% 3.01% 0.97% 0.86% 0.86% 0.80% 0.86% 0.80%
Other, net 1.84% 2.46% 3.06% 3.03% 3.32% 3.19% 3.15% 3.19% 3.11%
Total Other Noncurrent Assets 2.49% 3.16% 6.07% 4.00% 4.18% 4.04% 3.95% 4.05% 3.91%
Total Assets 32.47% 35.60% 40.84% 50.69% 57.09% 53.87% 52.14% 51.81% 51.64%
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable 6.71% 6.90% 6.08% 7.00% 7.00% 5.00% 4.00% 8.00% 5.00%
Other Current Liabilities 2.03% 2.16% 2.45% 2.35% 2.35% 3.00% 2.35% 2.35% 3.00%
Total Current Liabilities 8.74% 9.06% 8.54% 9.35% 9.35% 8.00% 6.35% 10.35% 8.00%
Deferred Income Taxes 2.58% 2.71% 2.70% 4.97% 4.12% 3.34% 3.23% 3.01% 3.42%
Other Noncurrent Liabilities 1.96% 1.74% 1.95% 2.33% 2.33% 3.00% 3.00% 2.33% 3.00%
Long‐Term Debt 4.81% 7.51% 10.48% 10.14% 11.42% 10.77% 10.43% 10.36% 10.33%
Total Liabilities 18.10% 21.01% 23.66% 26.79% 27.22% 25.12% 23.01% 26.06% 24.75%
Shareholders' Equity
Common Equity 3.32% 3.22% 3.15% 4.76% 5.26% 4.64% 4.26% 3.99% 3.74%
Retained Earnings 11.07% 10.48% 11.43% 20.11% 22.86% 21.05% 21.03% 21.81% 22.55%
Treasury Stock ‐1.08% ‐2.12% ‐3.25% ‐6.72% ‐9.42% ‐8.75% ‐8.48% ‐8.35% ‐8.23%
Other Appropriated Reserves ‐0.42% ‐0.14% ‐0.37% ‐0.40% ‐0.44% ‐0.39% ‐0.36% ‐0.33% ‐0.31%
Total Shareholders' Equity 12.90% 11.44% 10.97% 17.74% 18.26% 16.55% 16.46% 17.11% 17.75%
Noncontrolling Interest 1.47% 3.15% 6.21% 6.16% 11.61% 12.21% 12.67% 8.64% 9.13%
Total Equity 14.37% 14.58% 17.18% 23.91% 29.87% 28.76% 29.13% 25.75% 26.89%
Total Liabilities & Shareholders' Equity 32.47% 35.60% 40.84% 50.69% 57.09% 53.87% 52.14% 51.81% 51.64%

19. Value Drivers
Tesoro Corporation
In millions
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Sales 32,961 37,612 40,607 27,070 24,631 28,064 30,557 32,655 34,811
Less: Cost of Sales 30,505 35,884 38,549 24,363 22,907 26,100 28,112 29,716 31,678
Less: SG&A costs 297 275 323 271 246 281 306 327 348
Less: Depreciation 295 322 363 366 385 404 424 445 468
Less: Amortization 150 167 199 190 202 215 225 259 280
Add: Implied Interest of operating leases 54 58 75 83 84 85 86 88 91
EBITA 1,768 1,022 1,248 1,963 975 1,150 1,576 1,996 2,128
Income Tax Provisions 0 0 0 0 0 0 0 0 0
Tax Shield on Operating Leases 19 20 26 29 29 30 30 31 32
Tax Shield on Interest Expense 58 53 82 89 58 59 63 67 71
Less: Tax on interest/investment income 0 0 0 0 0 0 0 0 0
Tax shield on Ammortized Goodwill 0 0 0 0 0 0 0 0 0
Less: Tax non‐operating Income 0 0 0 0 0 0 0 0 0
Tax Shield non‐operating losses 0 0 0 0 0 0 0 0 0
Adjusted Taxes 77 73 108 118 87 89 94 98 103
Change in Deferred Taxes (82) 217 131 (247) 330 77 (48) 3 (207)
NOPLAT 1,609 1,166 1,270 1,597 1,218 1,138 1,434 1,901 1,818
Operating Current Assets 3,223 4,402 4,457 2,788 2,734 3,143 3,331 3,625 4,038
Normal Cash 424 524 583 406 369 421 458 490 522
Accounts Recievable 1,221 1,313 1,435 758 788 842 1,069 1,110 1,288
Inventory 1,578 2,565 2,439 1,624 1,576 1,880 1,803 2,025 2,228
Prepaid Expenses ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Other Operating Current Assets ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Operating Current Liabilties 3,292 3,855 3,885 3,557 3,056 2,659 2,526 3,914 3,249
Accounts Payable 2,213 2,596 2,470 1,895 1,724 1,403 1,222 2,612 1,741
Accrued Expenses 229 241 317 317 317 317 317 317 317
Deferred Revenue ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Income Taxes Payable 850 1,018 1,098 1,345 1,015 939 987 984 1,191
Dividends Payable ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Operating WC (69) 547 572 (769) (322) 484 805 (289) 789
Net PPE 5,245 6,875 9,045 9,527 10,004 10,504 11,029 11,581 12,160
Other LT Operating Assets 1,721 2,149 3,707 2,391 2,403 2,577 2,721 2,912 3,029
Net Intangible Assets 214 263 1,222 262 212 240 244 281 278
PV of operating lease 900 961 1,242 1,308 1,374 1,443 1,515 1,590 1,670
Other Assets 607 925 1,243 821 817 895 963 1,041 1,082
Other LT Operating Liabilities 291 (143) (530) (1,189) (1,746) (1,614) (1,675) (1,967) (1,820)
Warranty Liabiltites 0 0 0 0 0 0 0 0 0
Deferred Revenue 0 0 0 0 0 0 0 0 0
Other Liabilties 291 (143) (530) (1,189) (1,746) (1,614) (1,675) (1,967) (1,820)
Invested Capital 6,606 9,714 13,880 12,339 13,830 15,180 16,230 16,171 17,798
NOPLAT 1,609 1,166 1,270 $1,597 $1,218 $1,138 $1,434 $1,901 $1,818
Beg. Invested Capital 9,714 6,606 9,714 13,880 12,339 13,830 15,180 16,230 16,171
ROIC 16.57% 17.65% 13.08% 11.51% 9.87% 8.23% 9.45% 11.71% 11.24%
FCF 1,582 (1,942) (2,896) 3,139 (273) (212) 384 1,960 1,818
NOPLAT 1,609 1,166 1,270 1,597 1,218 1,138 1,434 1,901 1,818
Change in invested Capital 27 3,108 4,166 (1,541) 1,491 1,349 1,051 (59)
EP 628 701 587 622 351 166 367 760 682
Beginning Invested Capital 6,579 6,606 9,714 13,880 12,339 13,830 15,180 16,230 16,171
ROIC 16.57% 17.65% 13.08% 11.51% 9.87% 8.23% 9.45% 11.71% 11.24%
WACC 7.03% 7.03% 7.03% 7.03% 7.03% 7.03% 7.03% 7.03% 7.03%

20. Weighted Average Cost of Capital (WACC) Estimation
Tesoro Corporation
Market Value of Debt 5,496
LT debt 4,254
ST debt 0
PV of Operating Leases 1242
Pretax cost of Debt 6.00%
Marginal Tax Rate 35%
After‐Tax Cost of Debt 3.90%
Average Weight of Debt 28.84%
Market Value of Equity 13,559
Risk Free Rate 2.90%
Market Premium 4.62%
Beta 1.168
Cost of Equity 8.30%
Average weight of Equity 71.16%
Market Value of Preferred Stock 0
Value of Capital(D+E+PFD) 19,055
WACC 7.03%

21. DCF/EP Models
Tesoro Corporation
Key Inputs:
CV Growth 0.50%
CV ROIC 11.24%
WACC 7.03%
Cost of Equity 8.30%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E
DCF Model
FCF 3,139 ‐ 273 ‐ 212 384 1,960 1,818
CV 26,610
Discount Periods 1 2 3 4 5 5
Discount Factor 1.07 1.15 1.23 1.31 1.40 1.40
Present Value 2,933 238‐ 173‐ 293 1,396 18,948
PV(FCF) 23,158
+ Non‐Operating Assets
Excess Cash & ST Investments 200
‐ Non‐Equity Claims
Total Debt 4,254
PV Operating Leases 1,380
ESOP 46
Pension & Retirement Obligations 844
Minority Interest 2,522
PV (Equity) 14,312
Shares Outstanding 126
Unadjusted Price $113.87
Partial Year Adjustment 1.06
Target Price $120.29
EP Model
Beginning Invested Capital 13,880 12,339 13,830 15,180 16,230 16,171
EP 622 351 166 367 760 682
CV 10,441
Discount Period 1 2 3 4 5 5
Discount Factor 1.07 1.15 1.23 1.31 1.40 1.40
Present Value 581 306 135 280 541 7435
PV(EP) 9,278
Beg Invested Capital 13,880
PV(Operations) 23,158
+ Non‐Operating Assets
Excess Cash & ST Investments 200
‐ Non‐Equity Claims
Total Debt 4,254
PV Operating Leases 1,380
ESOP 46
Pension & Retirement Obligations 844
Minority Interest 2522
PV (Equity) $14,313
Shares Outstanding 126
Unadjusted Price $113.88
Partial Year Adjustment 1.06
Target Price $120.29

22. DDM Model Assumption
Tesoro Corporation
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E(CV)
EPS 8.51$ 3.95$ 5.23$ 7.60$ 10.18$ 10.99$
Key Assumptions
CV growth 0.50%
CV ROE 10.99%
Cost of Equity 8.30%
Future Cash Flows
P/E Multiple (CV Year) 12.24
EPS (CV Year) 10.99$
Future Stock Price
Dividends Per Share $1.70 $2.00 $2.20 $2.40 $3.20 $134.54
Number of Periods to Discount 1 2 3 4 5 5
Discounted Cash Flows 1.57 1.71 1.73 1.74 2.15 90.32
Intrinsic Value 99.22$
Partial year Adjustment 1.06$
Target Price 104.81$

23. Relative P/E Models
Tesoro Corporation
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16
VLO Valero $65.92 $8.53 $6.85 7.7 9.6 9.9 0.78 0.97
SU Suncor $29.73 $1.04 $1.35 28.6 22.0 0.5 57.17 44.04
SUN Sunoco $33.13 $2.28 $2.52 14.5 13.1 20.2 0.72 0.65
ALJ Alon USA $16.36 $1.42 $0.84 11.5 19.5 24.6 0.47 0.79
HFC Hollyfrontier Company $48.97 $5.14 $4.06 9.5 12.1 18.9 0.50 0.64
Average 14.4 15.3 11.9 9.4
TSO Tesoro Corporation $111.66 $8.51 $3.95 13.1 28.3 0.1 136.2 293.6
Implied Value:
Relative P/E (EPS15) $ 122.40
Relative P/E (EPS16) 60.28$
PEG Ratio (EPS15) 9.78$
PEG Ratio (EPS16) 3.58$

24. Key Management Ratios
Tesoro Corporation
Fiscal Years Ending Dec. 31 Formulas 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Liquidity Ratios
Current Ratio Current Assets/Current Liabilities 1.61 1.56 1.46 1.23 1.32 1.55 1.91 1.19 1.60
Quick Ratio (Cash+A/R+ST investments)/Current Liabilitie 0.99 0.75 0.70 0.59 0.63 0.71 0.98 0.59 0.80
Cash Ratio Cash/Current Liabilities 0.57 0.36 0.29 0.29 0.29 0.34 0.43 0.26 0.34
Activity or Asset‐Management Ratios
Inventory Turnover Cost of Goods Sold/Inventory 19.33 13.99 15.81 15.00 14.53 13.88 15.59 14.68 14.22
Asset Turnover Ratio Revenue/Total Assets 3.08 2.81 2.45 1.97 1.75 1.86 1.92 1.93 1.94
Fixed Asset Turnover Revenue/PPE, net 6.28 5.47 4.49 2.84 2.46 2.67 2.77 2.82 2.86
Financial Leverage Ratios
Debt ratio Total Debt/Total Assets 0.15 0.21 0.26 0.20 0.20 0.20 0.20 0.20 0.20
Interest Coverage Ratio EBITA/Interest Expense 10.39 6.38 4.99 7.37 6.25 6.31 8.21 9.98 10.03
Debt to Equity Ratio Total Debt/Total Equity 0.34 0.51 0.61 0.42 0.38 0.37 0.36 0.40 0.38
Profitability Ratios
Gross Profit Margin Net Income/Sales 2.25% 1.04% 2.15% 3.73% 1.77% 1.89% 2.61% 3.25% 3.27%
Return on Assets Net Income/Average Total Assets 6.94% 2.93% 5.26% 7.35% 3.10% 3.52% 5.01% 6.28% 6.33%
Return on Equity Net Income/Average Total Equity 15.69% 7.15% 12.50% 15.60% 5.93% 6.59% 8.98% 12.64% 12.18%
Payout Policy Ratios
Dividend Payout Ratio Dividend Per Share/Earnings Per Share 0.05 0.30 0.16 0.20 0.54 0.48 0.35 0.35 0.36
Retention Ratio 1‐(Dividends Per Share/Earnings Per Share) 95.01% 69.74% 84.15% 79.54% 46.17% 51.72% 65.23% 65.42% 63.98%