1. Addendum: Thoughts on Aecom (AeCON)
▪ We want to sell our stake in Aecom
because:
▪ Almost zero alpha
▪ No dividend (to make up for zero alpha)
▪ No demonstrated ability to generate
profit
▪ Tl;dr – This investment has been
unproductive and doesn’t look like it
will become productive soon, despite
what analysts say.
▪ We are skeptical about selling off our
stake in Aecom right now because it is
at a low price relative to its price
targets.

2. Addendum: Thoughts on Aecom
We got in

3. Addendum: Thoughts on Aecom
▪ Analyst price targets are above its
current price, which has dropped
recently
▪ Analysts rate it as a buy because of
its low current price, revenue growth,
etc.
▪ Problem: Analysts have been pretty
bullish on it forever, and it seems to
always underperform

4. Addendum: Thoughts on Aecom
▪ To consider (not up for vote)
▪ Put in a limit order for around $30-$31 to sell it
▪ Monitor price expectations after putting in limit order
▪ Reanalyze the industrials sector at that time, as it is already under-allocated and
would be even more under-allocated upon selling Aecom.

6. Sensitive Sector – Russell Romney, Justin Marino, Josh Rudolph – October 27, 2016

7. Investment Thesis
Tesoro is an established company with solid
assets, outstanding operating measures, and an
excellent financial position. It is investing in
sustainably expanding its competitive advantage
by increasing its access to lower-price crude oil.
The company is also well-poised to handle future
uncertainty.
We believe that Tesoro is undervalued considering
its operating, financial, and growth position relative
to its own results and to that of its peers in the oil
refining and marketing sector, and that its high
growth potential makes it a great investment.

8. Company Profile
▪ Fortune 100 company
▪ Independent refiner and marketer of petroleum products
▪ Strategically concentrated presence in the western U.S.
▪ Holds a 36% interest in Tesoro Logistics Partners, including the general partner
interest
▪ “Moving ahead, we are committed to continuing to meet and exceed the
standards of safe, reliable operations, while focusing on improving profitability
and increasing shareholder value” (Company History | TSOCORP).
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

9. Snapshot
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

10. Products/Services
▪ Three revenue streams:
▪ Refining
▪ Marketing
▪ Tesoro Logistics
▪ Tesoro "operates seven refineries with a total crude oil capacity of 850,000
barrels per day after the acquisition of BP's 266 mb/d Carson refinery and the
shutdown of its Hawaii refinery"
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

11. • Products/Services
▪ Operates retail fuel outlets in the Western and midcontinental United States
▪ "Tesoro’s retail-marketing system includes over 2,400 retail stations under the
ARCO®, Shell®, Exxon®, Mobil®, USA Gasoline™, Rebel™ and
Tesoro® brands" (Company Profile | TSOCORP)

12. Products/Services
▪ Total operating income is derived
approximately from
▪ 65% from refining,
▪ 20% from marketing (retail fuel
outlets), and
▪ 15% from Tesoro Logistics (36%
equity interest)

13. Upcoming Events
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

14. Locations
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
▪ Tesoro’s operations
are concentrated on
the West coast of the
US, with some activity
in the Bakken shale
fields.

15. Industry Overview
▪ The Oil & Gas Refining & Marketing industry consists of companies engaged in
the operation of oil and gas refineries for the production of heating, lubricating
and fuel oils, as well as gasoline, diesel, jet fuel, propane, kerosene and other
liquefied petroleum gas (LPG) products. The industry also includes marketing
operations, such as bulk gasoline and crude oil terminals, and truck and
automobile service stations with or without convenience stores. The industry
excludes refining and marketing operations with substantial exploration and
development operations, classified in Integrated Oil & Gas.
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

16. Industry – Fair Value
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
Oil & Gas Oil & Gas Integrated
Oil & Gas Midstream Oil & Gas Refining & Marketing

17. ▪ Energy Sector (as a whole) is
overvalued right now.
▪ Oil & Gas Refining & Marketing subsector
is undervalued right now.
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
 Neither are short-term trends; it’s been
like this for several months.
Industry – Fair Value (longer term)

18. Industry Moat
▪ The Oil & Gas Refining and Marketing industry is difficult to earn an economic moat in
▪ Economic moats in refining are earned through
▪ Proximity to crude production or access to stranded crude that results in the refiner capturing
a discount to international benchmarks or
▪ Investing in being able to process lower-quality crude oil at a similar cost (easier, but less
successful)
▪ Refining is a highly competitive business with no product differentiation, and
refiners are price takers, with little control over input or output costs.
▪ Questions surround the sustainability of crude discounts prevent refiners from earning
wide economic moats
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

19. Industry Indicators
• The Brent/WTI price spread has
decreased rapidly as US midstream
companies have invested in better
transport.
• US refiners have had an input cost
advantage when the spread is higher as
they refine cheaper oil and sell refined
output in a higher-price Brent-crude-
dominated market. That advantage has
disappeared as the spread has declined.
• It has become more important to gain
access to cost-advantaged (a.k.a.
stranded) oil production.
• Tl;dr – When the Brent/WTI spread is
wider, midcontinent-focused US
refiners have a profitability advantage,
but this advantage is declining
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

20. Industry Indicators - Commodity Prices
Tesoro (TSO) vs United States Oil (USO) 5 years
- Despite drop in oil prices starting
in 2014 and continuing, Tesoro
has shown strong share price
increase
- As a refiner and marketer with
relatively stable margins, oil
prices don’t [perfectly] correlate
to success of company like it
would with a driller
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

21. Industry Indicators – Input Costs
▪  Input costs are expected to rise in 2017 from lows in 2016.
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

22. Economic Moat: Narrow
Moat Trend: Stable
▪ From Morningstar:
▪ Midcontinent oil refineries get price discounts compared to coastal refineries
because oil production is stranded .
▪ Tesoro has the only refinery in the Bakken region, and has invested in expanding
its two midcontinent refineries to take greater advantage of those price discounts.
▪ Those price discounts are disappearing with the Brent/WTI spread convergence, so
Tesoro’s west-coast focus makes less of a difference
▪ Tesoro has also:
▪ Undertaken one of the largest crude-by-rail project in the US to bring over
350,000 bpd from the Bakken region to a new facility in Vancouver, Washington,
which will increase its yield and margins (compared to paying coastal rates for crude)
and decrease its reliance on higher-cost imports from abroad and from declining
Alaska/California. production
▪ This will also increase access to marine traffic
▪ Acquired BP’s Carson refinery in 2013; the company will continue to integrate that
with its adjacent Wilmington refinery and realize cost and margin benefits from its
added scale. (both refineries are next to each other in Los Angeles, California)
▪ Closed its high-cost Hawaii refinery that was not very profitable
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

23. Economic Moat: Narrow
Moat Trend: Stable
▪ Tesoro has the highest Refining Margin Per Barrel of any
of its immediate competitors (Valero, Marathon, Phillips
66)
▪ In the refining business, everything pretty much relies on
refining margins; because Tesoro's are higher, it will be
better able to withstand increases in the price of oil.
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

24. Economic Moat Summary
▪ Tesoro’s investment in access to stranded production will give them feedstock
(crude input) discounts to maintain their refining margin advantage.
▪ Tesoro will continue to realize cost efficiencies from combining its refinery with
BP’s refinery and from investment in its midcontinent refineries.

25. Tesoro vs. Competitors (price history)
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
• Tesoro has consistently
demonstrated its ability to
beat its closest
competitors in price
returns.
• Morningstar analysts rate
the beginning of CEO
Goff’s tenure as
successful; overall
stewardship is Standard.

26. Key Financial Ratios
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
R/E to
total
assets
• Tesoro does better than its immediate competitors in
almost any financial metric.
• Higher recent and average gross margin, operating
margin, and profit margin.
• Dupont: ROE and ROA are higher than competitors,
both recently and on average.
• ROIC is high, and the higher RE/TA shows a
moderately mixed investment financing strategy.

27. EBITDA growth
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

28. Revenue Breakdown:
Increasing importance of TLLP
(Tesoro Logistics LP, a TSO Master Limited Partner subsidiary)
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
• Marketing’s effect on income is equal to
[Marketing – Intersegment Sales]
• Tesoro’s MLP TLLP has played an increasingly
important role in Tesoro’s revenue. TLLP has a three-star
rating in Morningstar right now and a market cap of $4.8B.

29. Debt breakdown
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
- As Tesoro has invested in increasing their competitive advantage, they have also marginally
increased their debt to equity and leverage. However, these have stabilized both after a
large spike in 2014; they are and will continue to realize the gains on those investments in
the next several years.

30. Weighted Average Cost of Capital
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
Trend
(added)
• Tesoro’s WACC
has decreased
over time even as
the company has
continued to
invest in growth.
•  lower-risk

31. Debt breakdown: ability to pay
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
Because of its strong capital structure and
comfortable cash position, Tesoro will have
no problem honoring its liabilities.

32. Cash Position
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

33. Cash Position - Sustainable Growth Rate
▪ A measure of the firm’s ability to
grow using only current cash and
funds from operations
▪ Tesoro’s cash flow position has
increased relative to its competitors
and it has a larger ability to grow
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

34. Fair Value and Price Ratios
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

35. Analyst Opinions
▪ Morningstar
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

36. Bullish & Bearish Perspectives
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

37. Beta
0 0.5 1 1.5 2 2.5
alon
pbf
phillips 66
ppg
hollyfrontier
western
average
valero
delek
tesoro
marathon
Beta by firm, Refining & Marketing
▪ Tesoro’s Beta is 2.03, which is high,
but it is not too much higher than its
industry average
▪ Our portfolio target Beta is 1.25we
need growth, and Tesoro’s higher
beta will help us toward that.
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

38. SWOT Analysis
▪ Strengths:
▪ Tesoro maintains good credit metrics with gross leverage of 1.5 times and net leverage
of 1.4 times at June.
▪ Excellent liquidity with $1.1 billion of cash and equivalents, full availability on the $2.1
billion borrowing base of the Tesoro Corp. revolving credit facility and $1.4 billion
available on Tesoro Logistics’ combined $1.6 billion credit facilities.
▪ Refining Margin/Barrel is higher than three nearest competitors
▪ Weaknesses
▪ Geographical Concentration, particularly in California
▪ Cost of production strongly affects margins
▪ As cost of production rises, margins will drop
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

39. SWOT Analysis
▪ Opportunities
▪ The priority to grow Tesoro Logistics should increase Tesoro’s own value through greater
distributions and further diversification of earnings and cash flow from more volatile
refining.
▪ Development of a crude by rail and marine facility in Washington
▪ "The increased throughput of discount crude, along with the integration of Carson, could
ultimately deliver upward of $615 million in annual EBITDA improvement by 2017"
▪ Threats
▪ Advances in the electric vehicle industry
▪ Legislation to reduce carbon emissions, paricularly in California
▪ Any extended turnaround or shutdown because of an accident
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

40. Other risks
▪ High current inventory levels could lower refining output for near future
▪ Interest rate liftoff could hurt plans for continued capital investment
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

41. Compared to Traditional Davis Guidelines
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary
Beta % Institutional
Investors
Market
Capitalization
Number of
Analysts
Davis Guideline 1.25 <65% > $500 million <10
Tesoro (TSO) 2.03 Unreported,
competitors
around 80%
$9.73 billion 16

42. Davis Portfolio Sector Allocations
Name
Current
value
Percent of
Portfolio
Target
allocationDifference
Domestic equity $369,506 75.3% 70% 5.3%
International equity $28,844 5.9% 10% -4.1%
Fixed income $37,060 7.6% 10% -2.4%
Cash $55,367 11.3% 10% 1.3%
Consumer
Discretionary $49,226 9.7% 6.00% 3.7%
Energy $39,736 7.8% 11.00% -3.2%
Financials $42,656 8.4% 7.00% 1.4%
Healthcare $57,493 11.3% 10.00% 1.3%
Technology $34,094 6.7% 10.00% -3.3%
Industrials $26,492 5.2% 7.00% -1.8%
Consumer Staples $61,831 12.1% 9.00% 3.1%
Utilities $29,743 5.8% 4.00% 1.8%
Telecommunications $11,721 2.3% 2.00% 0.3%
Basic Materials $16,515 3.2% 4.00% -0.8%
▪ Target sector allocations are not
extremely important, but we are
under
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary

43. Proposal
Buy 200 shares of TSO at $84.38 per
share for a total of $16,876.
Effect on portfolio:
Cash allocation from 11.3% to 7.9%
(target 10%)
Energy allocation from 7.8% to 11.1%
(target 11%)
Company
Overview
Industry Analysis
Competitive
Position
Financial Analysis Valuation Risks Summary