Wise Investments

[bernoulli]

Concerning TSO comment: One has to consider why they were at $7. and change to begin with. Then look at why even at $71. they are still seriously undervalued by the market.

I will only look at why the market is still undervaluing TSO

1. If one only considers the ttm, trailing twelve months, earnings and then does a price to earnings multiple based on this, TSO is trading at multiple of 71/6.35 which is 11.18, in line with other refiners ie. Don't make the mistake of comping integrated, up and downstream oil companies p/e multiples with refiners, downstream only. So look at Valero p/e as a good comparison which is, Vlo 62/5.63 or 11.01.

2. Next, look at the ttm on TSO, Q4 2004 eps is one cent, Q1 2005 is 49 cents,
Q2 2005 is $2.65, Q3 2005 is $3.20. Totals above is $6.35

3. Next, look at the ttm on VLO, Q4 2004 eps is 95 cents, Q1 2005 is 96 cents,
Q2 2005 is $1.53, Q3 2005 is $2.19. These are split adjusted earnings. Totals above or $6.35 see following link to confirm earnings stated.

http://www.fulldisclosure.com/highlight.asp?client=cb

4. Next, look at the differences in the earnings trends keeping in mind that the market is valuing both companies equally. VLO's Q4 04 eps is about 62% of their Q2 05 earnings and their Q1 05 are about the same or 62%. Why is there such a difference between VLO's quarterly comps and TSO ?

5. In Q4 04 and Q1 05 quarters TSO was dealing with some long term management people whos primary interest was lining their own pockets, in addition, TSO was upgrading their refineries to comply with EPA pollution standards. Thus explaining why VLO paid a 5 million fine to the EPA last ttm and TSO didn't. Next, mgmt issues, VLO, Mr. Greehey, has never been nor most likely will never be the type of CEO which isn't interested in building shareholder value. He is a good, very good, CEO, one of the best. However, TSO was getting rid of their CEO and had to pay him over 6 million cash to do it and they were pumping money into scrubbers, etc., updating their facilities in addition to these they were plagued with problems. See below to see just how plagued

http://www.tsocorp.com/stellent/groups/public/documents/published/tsi_md_pr__2005__prod_024499.hcsp.

Next:In Q1 05 the refinery and management changes at TSO continued to seriously affect their bottom line. The management charges of 9 cents are considered a one time charge in the above quarterly eps. In other words including this charge their eps for this quarter would of been 40 cents not stated 49 cents. However, the point is they still had infective mgmt and continued to pour bucks into their refineries. For complete info. See the below link.

http://www.tsocorp.com/stellent/groups/public/documents/published/tsi_md_pr__2005__049707.hcsp

6. Beginning in Q2 05 continuing in Q3 05, we see a dramatic uptick in their eps.
By then we have a new CEO, Mr. Bruce Smith, and the previous refinery problems have been corrected. Thus significantly increasing their bpd production and significantly decreasing their expenses money they were pouring into fixing refineries. My point is I seriously doubt, with existing gasoline demand, that TSO will go back to an eps of one cent.

7. Next: Compare TSO and VLO: Everyone knows Mr. Greeheys genius was when he built VLO's refineries, he built about 60% of them to handle sour crude, like Mayan and Mars Platform, produces. The thing most don't know is that TSO, when they were upgrading their refineries a). Upgraded some of the refineries to produce their own electricty and b) Also upgraded three refineries to refine sour crude. They, too now run about 60% sour. Why is this a big deal, mainly because the sweet sour spread is over twenty bucks a barrel. Sour is $20 less than WTI
Comparable operations is my point. However, VLO refines about 3 mil bpd and TSO refines about 560 thousand bpd. However, VLO has 618.7 million shares and TSO has about 69 million shares. Lets see here, a refining capacity of about 19% of VLO and shares of about 11% of VLO. Meaning, ratio wise, they have almost twice the refining capacity with almost half the shares.

8. Given the above, lets assume going forward they both have equivalent management and their capitol budgets are the same. They won't be because VLO still has to install those billions in scrubbers, the EPA gave them a reprieve of this after Katrina, however, they are going to still have to do it. TSO did this in #7 above. However, lets go with the same percentage wise capitol budgets. I am establishing these are equivalent companies and they deserve equal p/e multiples going forward.

9. Suppose #8 above is true. Then a truer reflection of TSO earnings potential would be for Q4 05 would be 62% of 2.65, assuming no increase in margins this year over last, which is about $1.64 and Q1 06 eps would be about the same using 62% of $2.65 another $1.64. In both of the cases I am using the least case eps scenario. At least this much. Suppose Q2 05 still is $2.65 and Q3 05 still is $3.20, not allowing any increase in eps over last year. This means a realistic eps for the TTM is $9.13. Now since they both deserve equal multiples this reflects a current discounted fair value of about $101.00. With 11.04 eps multiple.

10. In summary, investors have discounted TSO shares about 30% not giving them any going forward credit. TSO is still seriously misunderstood.