Thursday, May 29, 2008

Tesoro and Lehman brothers

Today Lehman Brothers (yes the Investment Bank that disguises the true value of assets on their balance sheet as Level 3 "assets") had this to say about the refiners:

Lehman believes the latest demand estimate revision by the DOE combined with FHA's monthly traffic report provide further evidence to support our medium term bearish view on the US refining market. Firm thinks the refiner shares will not bottom at the earliest by the end of this year or 1H09, and will exit the year below recent lows. (

Let's take a look at this for just a minute. Oil prices have topped out. Lehman must disagree. Maybe Lehman thinks they are going to $200, or maybe they think like Dick Berner of Morgan Stanley that they are going to $150. Between the two firms they've managed to throw over $30 billion dollars away, so their prognostications are at best a very weak and feeble guess.

So I disagree with their analysis. Tesoro (TSO 23. 26) was down .88 cents on almost 8 million shares today as a casualty of Lehman's shoddy analysis. But you must expect this at the bottom. Western refining (WNR 12.24) up .79 today, hit it's low on May 13 at just under 8, on 8 million shares.

The catalyst? Shoddy analysis by Caris & Company who downgraded the stock to a sell with a $2.75 target! So Lehman, attempts to take the high road, (excuse my sarcasm) and speaks in general negatives about the entire refining group.

So TSO is just a point off it's 52 week low, with declining cost of oil, and crack spreads that have widened $13 in just the past three weeks! Time to sell? Ridiculous. It is time to buy.

Now I'm picking on Lehman for a reason, because they have gotten a lot of press as they just put out their latest 10Q, and it is raising eyebrows in the shortselling community. It's a mess.

I just wanted to compare their 10Q with Tesoro's. TSO has a current market cap of about $3.2 billion dollars. But look at page 35 of TSO's 10Q:

We maintain inventories of crude oil, intermediate products and refined products, the values of which are subject to fluctuations in market prices. These inventories totaled 30 million barrels and 29 million barrels at March 31, 2008 and December 31, 2007, respectively. The average cost of these inventories at March 31, 2008 was approximately $42 per barrel on a LIFO basis, compared to market prices of approximately $103 per barrel. If market prices decline to a level below the average cost of these inventories, we would be required to write down the carrying value of our inventory.

So TSO has 30 million barrels of oil at $42 a share that is selling at $126 a share. I know this is just simple math, and not a complicated algorithm that Investment Banks prefer, but the last I checked 126-42=84. So TSO is sitting on an $84 dollar profit on 30 million barrels of oil. $84 X 30 million barrels is a $2.5 billion unrealized gain.

But then again, LEH uses their 10Q to hide the facts. Maybe their analysts just didn't read Tesoro's 10Q

Or maybe they just needed the stock down for an end of month mark for short hedge fund clients!

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