Recent gains in the bonds of Tesoro Petroleum have a sell-side analyst advising investors to take gains in the event of a short-term run up in the bonds, while another has a hold on the name. A New York-based buy-side analyst plans to steer clear of the entire refining sector, but says if he owned Tesoro's bonds he would sell them.
Tesoro's 9.625% notes of '12 were bid at 62 last Tuesday--up from 42 just four weeks earlier. If they trade up to 70, investors should sell, says Gary Stromberg, analyst at Bear Stearns. He argues that refining margins, which were strong in October, are typically weak in the fourth quarter and the first quarter. He is also concerned that Tesoro will not meet a deadline with its banks requiring it to sell $175 million in assets, as a pending $110 million sale to Williams Energy Partners is facing scrutiny from the Federal Trade Commission.
Adam Leight, analyst at Credit Suisse First Boston, says the bonds are probably worth 35-40 in a worst case scenario--if the company goes bankrupt and is forced to sell assets in a depressed market. However, if they don't end up filing, bondholders get a huge discount, he says.
The New York-based buy-side analyst says he will not recommend any bonds of refining companies unless he sees signs of a historical shift in pricing trends for crude oil. The analyst says price competition from European imports and weak demand from a depressed airline industry have contributed to a volatile pricing environment that is particularly difficult for Tesoro, as it does not have a substantial cash cushion. He believes the industry fundamentals will not change any time soon.