TEXT-S&P affirms Tesoro Corp after acquisition announcement

Overview
-- U.S. refining company Tesoro Corp. announced plans to purchase
BP PLC's Southern California refining and marketing business in Carson
City for $1.2 billion plus the value of the inventory ($1.3 billion at current
prices).
-- We are affirming our 'BB+' corporate credit rating on Tesoro and are
maintaining our stable rating outlook. We are also affirming our 'BB+' senior
unsecured and 'BBB' senior secured ratings.
-- The stable outlook reflects our expectations that Tesoro will
successfully integrate the Carson City refining and logistics operations while
maintaining moderate financial leverage and managing upcoming carbon tax
regulation in California that could pressure profitability.

Rating Action
On Aug. 13, 2012, Standard & Poor's Rating Services affirmed its 'BB+'
corporate credit rating on Tesoro Corp. and maintained the stable outlook. We
also affirmed our 'BB+' senior unsecured and 'BBB' senior secured issue-level
ratings. As of June 30, 2012, Tesoro had nearly $1.7 billion of total debt.

We base the ratings on U.S.-based Tesoro on our view of the company's "fair"
business risk profile as a larger, albeit geographically concentrated
independent oil refiner, and its "intermediate" degree of financial risk.
Standard & Poor's assessment of Tesoro's business risk profile incorporates
the inherent risks Tesoro faces in the highly volatile and capital-intensive
refining industry. Tesoro is subject to difficult industry conditions,
including excess refining capacity globally, volatile feedstock costs, and
persisting weak end-user demand for gasoline.

Rationale
The acquisition of BP's Carson City refinery assets increases Tesoro's
refining capacity by about 265,000 barrels per day, while adding production
flexibility to Tesoro's West Coast refining operations. The refinery is
complex, with a 13.3 Nelson complexity score, but moreover is adjacent to
Tesoro's existing Wilmington refinery, which should provide operational
efficiencies and allow the combined refineries to produce a greater proportion
of distillates (as opposed to gasoline), for which demand is higher.

In addition to the refinery, Tesoro will be acquiring significant logistics
assets. In fact, the company ascribes roughly $1 billion of the $1.3 billion
acquisition price to the logistics assets. They have considerable synergies
with the company's existing logistics operations and will also help the
refineries gain access to discounted crudes while reducing product
distribution costs to some of its customers. We expect that the logistics
assets (which include three marine terminals, a very large crude
carrier-capable dock and more than 114 miles of pipeline) will generate
stable, fee-based revenues while giving Tesoro the opportunity to eventually
monetize these cash flows by dropping assets down (i.e., selling them) to
their master limited partnership (MLP), Tesoro Logistics. In addition, we also
ascribe some value to about 800 retail stores of the "ARCO" and "ampm" brands,
and accompanying assets that include a 51% ownership of the 400 megawatt power
plant, and an anode-grade coke-producing unit.

Offsetting these strengths is the greater concentration of cash flows from
California (where about 60% of Tesoro's refining capacity will be located pro
forma the acquisition). In our view, refining margins may come under pressure
starting in 2015, due to implementation of carbon taxes, per regulation AB32.
Under this regulation, California refineries will be held accountable for
emissions stemming from the use of the transportation fuel they produce,
primarily automobile emissions. The related cost burden could be substantial
for Tesoro and some of its peers, depending partly on how the state ultimately
implements the program. (See "California Set To Launch Ambitious Cap And Trade
System As Federal Efforts On Pollution Control Falter," published Jan. 13,
2011, on RatingsDirect.) Historically, Tesoro's refineries in California
generated above-average margins given their ability to meet fuel
specifications imposed by the California Air Resources Board that most
refineries outside the PADD V region were unable to supply economically.
However, Tesoro's refineries in California have not been as efficient as some
of its direct competitors. If integrated properly, the combined Carson
City-Wilmington refineries should position Tesoro more favorably, given the
increased scale and greater distillate focus. As such, the two refineries
could be less vulnerable to an industry shake-out if AB32 hurts California's
refining industry.

Tesoro's two smaller Mid-Continent refineries in Utah and North Dakota
continue to perform well, benefiting from cheaper crude oil feedstocks and
limited crude and refined product pipeline capacity that provides market
insulation that coastal markets do not enjoy. The extent of these advantages
could diminish over time as regional crude oil transportation constraints are
addressed.

We expect the company to fund this transaction largely with cash-on-hand, and
with proceeds from selling its Hawaii refinery, which it had announced
earlier. The company also expects to drop down some of the logistics assets to
Tesoro Logistics, which could raise as much as $1 billion in the first year of
the acquisition. Typically, MLPs fund acquisitions with a balanced mix of debt
and equity. Tesoro also expects to reduce some inventory during this process.
Overall, we expect these actions to result in a manageable level of additional
debt at Tesoro. Given the cash flows coming from the refining and logistics
operations and our view of additional synergies available from these assets,
we expect Tesoro's credit measures to stay in the current range, with
debt/EBITDA roughly at 1.5x to 2x. For this we assume Tesoro will maintain
current margins until the transaction is complete in 2013. However, we
recognize that refining margins are highly volatile and that Tesoro's credit
ratios and profitability will vary widely throughout the refining cycle.

Liquidity
We view Tesoro's liquidity as "adequate".

On a stand-alone basis, Tesoro has cash sources of about $2.3 billion,
consisting of $1.3 billion of cash (management has indicated publicly that the
company's cash position target is $600 million, on average), $946 million of
revolving credit facility availability, and roughly $1.5 billion of funds from
operations, given the current margin environment. Uses consist of capital
spending in the $600 million area, current debt maturities of $299 million,
and some distributions.

The company has not announced all the details associated with the interim
financing of the proposed acquisition, but we expect that its liquidity will
remain at least adequate (i.e., with a sources divided by uses ratio of 1.2x)
at the transaction's close.

Recovery analysis
Our issue-level rating on Tesoro's secured revolving credit facility is 'BBB'
(two notches higher than the 'BB+' corporate credit rating), and the recovery
rating is '1', indicating our expectation for very high recovery (90% to 100%)
in the event of a default. The issue-level rating on the senior unsecured
notes is 'BB+' (the same as the corporate credit rating on the company). The
recovery rating is '3', which indicates our expectation for meaningful (50% to
70%) recovery in the event of a payment default. Although numerically our
analysis indicates recovery of 70% to 90% for the senior notes, the recovery
ratings on unsecured debt issued by entities with corporate credit ratings in
the 'BB' category are capped at '3', given the potential for changes to the
capital structure and asset protection levels in advance of a default. We will
evaluate the recovery ratings when the transaction closes, but believe they
will not likely change, given our expectation of debt levels and the value of
the Carson City refinery.

Outlook
The stable rating outlook reflects our expectations that Tesoro will
successfully integrate the Carson City refining and logistics operations while
maintaining moderate financial leverage and managing upcoming carbon tax
regulation in California that could pressure profitability. Although greater
scale and possible synergies strengthen the credit, we continue to have
concerns regarding longer-range profit potential amid a weak economy and the
quantitative impact of regulatory issues in California. We currently view the
likelihood of a rating upgrade as limited in the near term. In the interim, we
believe there is significant leeway in the rating to sustain periods of subpar
financial performance owing to cyclical factors, although we could reassess
the rating if--contrary to our current expectations--we came to believe that
the company's adjusted debt to EBITDA would rise above 3x assuming a
normalized refining margin environment.

Related Criteria And Research
-- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil
Price Assumptions Are Unchanged, July 24, 2012
-- Why U.S. Refiners In The Midwest And Rockies Should Outperform Peers
in 2012, Dec. 7, 2011
-- Key Credit Factors: Criteria For Rating The Global Oil Refining
Industry, Nov. 28, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Playing It Safe: The Importance Of Safety Measures To Corporate Credit
Quality, Aug. 23, 2011
-- Strong Margins For U.S. Refiners Are Unlikely To Last, March 24, 2011
-- Assumptions For Assigning Recovery Ratings To The Debt of U.S. Oil
Refining Companies, March 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- California Set To Launch Ambitious Cap And Trade System As Federal
Efforts On Pollution Control Falter, Jan. 13, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- For U.S. Oil Refiner Ratings, 'Crack Spread' And Differential
Assumptions Are Crucial, Feb. 13, 2007
-- European Refining Business Risks: What Drives Cycles and Profits?,
Oct. 16, 2006

Ratings List
Ratings Affirmed; Outlook Stable

Tesoro Corp.
Corporate Credit Rating BB+/Stable/--
Senior Secured BBB
Recovery Rating 1
Senior Unsecured BB+
Recovery Rating 3

Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.