Following the decline in the Energy sector, we are looking for buying opportunities

throughout the Energy sector. Since the valuation and outlook for upstream and exploration

companies are not favourable for the time being, we are deciding to invest in the downstream

segment of the Energy market since we think that integrated downstream companies can take

advantage of the increasing Brent/WTI spreads, increased U.S production as well as higher

utilization rates

Main Contributors

Significant refining exposure, with high potential cost savings

Tesoro has ~75% EBITDA exposure to refining, ~11% retail and ~14% logistics in 2014A.

Tesoro is spending significant capital in refining in coming years, primarily to achieve Los

Angeles acquisition synergies and other margin enhancement opportunities.

West Coast refining improvement potential could experience enhancements

About 85% of TSO’s refining capacity is on the West Coast (~62% California, ~23% Pacific

Northwest and Alaska). California refining has been challenged for years by a combination

of a tough regulatory environment and excess refining capacity. This trend is expected to

improve over the next couple of years since the company has the potential to have access to

advantaged crude access via its Port of Vancouver project, which could aid margins. The

company may be able to generate an incremental ~4-5$ in gross margins

Strong cash flow generation from the Mid-Continent region

The remaining ~15% of TSO’s refining capacity is in the favorable Mid-Continent and

Rocky Mountain regions, which should continue to benefit from discounted Bakken and

Uinta crudes, respectively.

Sum of the parts valuation shows upside

A sum of the parts method was used in order to value Tesoro. For TSO, we estimate a

December 2015 price target of $1143/share, which represents 26% upside, including

dividends. Our approach uses a 3.5x EBITDA multiple for refining (West Coast discount

applied to the group average 4x), 8x for retail, a public market multiple for TLLP LP (~13x

implied EBITDA)

Tesoro Corporation, NYSE: TSO ($90.50) Alvy Mizelle

Buy – Target Price $113.98 March 31st 2015

Kenneth Woods Portfolio Management Program

Business Metrics

Price (March 31st 2015) 90.50

52 Low 47.03

52 Week High 94.83

Shares Outstanding (M) 87.2

Market Cap ($M) 11.38

Enterprise Value ($M) 14.48

Fiscal Year End Dec 31st

Financial Metrics ($B)

2013A Operating Income 3.42

2014E Operating Income 3.67

2013A Ebitda (B) 3.71

2014E Ebitda 4.10

Trading multiples

LTM EV/ Ebitda 5.9x

2015E EV/ Ebitda 5.4x

LTM P/E 12.0x

2015E P/E 11.6x

Company Description

Tesoro Corporation, through its subsidiaries,

engages in petroleum refining and marketing

activities in the United States. It operates in

three segments: Refining, Tesoro Logistics

LP (TLLP), and Retail. The Refining

segment refines crude oil and other feed

stocks into transportation fuels, such as

gasoline, gasoline blend stocks, jet fuel, and

diesel. It owns and operates 6 refineries with

a combined crude oil capacity of

approximately 850 thousand barrels per day.

The TLLP segment owns and operates a

network of approximately 3,500 miles of

crude oil, refined products and natural gas

pipelines; 28 crude oil and refined products

truck and marine terminals. The Retail segment sells gasoline and diesel fuel through

multi-site operator retail stations. As of

December 31, 2014, this segment operated a

network of 2,267 retail stations under the

ARCO, Shell, Exxon, Mobil, USA Gasoline,

and Tesoro brands. Tesoro Corporation was

founded in 1939 and is headquartered in San

Antonio,

Texas.

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Two Year Stock Price Performance

Contents Company Overview .......................................................................................................................... 3

Refining ........................................................................................................................................ 3

Logistics........................................................................................................................................ 6

Operational Levers ................................................................................................................... 7

Retail ............................................................................................................................................. 7

Brand Portfolio ......................................................................................................................... 7

West Coast and Mid-Continent refining exposure: .................................................................. 9

California Synergies ....................................................................................................................... 10

Port of Vancouver project .............................................................................................................. 11

Operational Diversity ..................................................................................................................... 13

Increasing Margins ......................................................................................................................... 13

Competition Analysis ..................................................................................................................... 14

Operating Margins ...................................................................................................................... 14

Valuation ........................................................................................................................................ 15

Operating Assumptions .............................................................................................................. 15

Sum of Parts Valuation ............................................................................................................... 17

Refining ...................................................................................................................................... 17

Retail ........................................................................................................................................... 17

TLLP ........................................................................................................................................... 18

Appendix ........................................................................................................................................ 19

Appendix 1: Management Team ................................................................................................ 19

Appendix 2: References .............................................................................................................. 20

Company Overview Tesoro Corporation is an independent petroleum refining and marketing company

headquartered in San Antonio, Texas. The company hasthree business lines including

refining, logistics (contained in the Tesoro Logistics MLP, TLLP) and retail. The refining

segment operates six refineries with total crude capacity of 850,000 Bpd, located in

California, Washington, Alaska, Utah and North Dakota. The logistics segment includes the

High Plains gathering system in the Bakken, the Northwest Products Pipeline, 19 crude oil

and refined products terminals, four California marine terminals, one rail unloading facility

and one petroleum coke handling facility. The retail segment includes a network of over

2,200 branded retail gas stations located in 17 states, mainly on the West Coast, but also in

the Southwest and Midwest US.

Refining Tesoro owns and operates six petroleum refineries in the western U.S., heavily weighted toward

the West Coast. The company’s total crude distillation capacity is 850kbpd. TSO separates its

refinery operations into three geographic regions: California, including the Martinez and Los

Angeles facilities (529kbpd of capacity, or 62% of total); Pacific Northwest, consisting of the

Anacortes and Kenai facilities (192kbpd of capacity, or 23% of total); and Mid-Continent,

including the Salt Lake City and Mandan facilities (129kbpd, or 15% of total). Refining is TSO’s

largest business, accounting for ~75% of 2014E EBITDA.

Source: Company Reports

Tesoro Locations

Tesoro’s Mid-Continent gross margins are TSO’s highest at $21.73/bbl due to access to advantaged

crudes from the Bakken in North Dakota and waxy crudes from the Uinta Basin in Salt Lake City,

Utah. Several recent projects are focused around improving gross margins in California and the

Pacific Northwest through the logistics system, providing increased access to advantaged crudes,

while synergies from the BP acquisition should further boost gross margins in California.

California is the least advantaged region from an operating cost perspective due to the more

stringent regulatory environment.

Tesoro's system-wide feedstock slate is composed of light crude (66%), heavy crude (27%), and

other feed stocks (7%). The Pacific Northwest and Mid-Continent regions run almost exclusively

light crudes, while California has more heavy crudes (42%) due to the higher complexity of the

Martinez and Los Angeles refineries.

Refinery Location Crude Oil Capacity (bpd)

Anacortes Refinery Anacortez, Washington 120,000

Kenai Refinery Kenai, Alaska 72,000

Loas Angeles Refinery Los Angeles California 363,000

Mandan refinery Mandan, N.D? 71,000

Martinez Refinery Martnez, California 166,000

Salt Lake Refinery Salt Lake City, Utah 58,000

Total 850,000

Refinery Locations and Capacity

EBITDA by Region

Source: Company reports and KWMPMP Estimates

Source: Company Reports

Refinery utilization, based on average throughput and average capacity, was 87% for the overall

system in 2013, while California ran at 92%, Mid-Continent at 89%, and Pacific Northwest at 76%.

Pacific Northwest has the lowest utilization in the group due to seasonality and challenging

competitive conditions in Alaska, while Mid-Continent’s decreased from 96% in 2012 due to

capacity expansions, where throughput has yet to fully ramp.

Following its recent acquisition of BP's Carson refinery, Tesoro has over 30% market share in Los

Angeles. Other sizable players include Chevron (~25%), Exxon Mobil (~14%), and Phillips 66

(~13%). Alon’s 70kbpd refinery is currently idled, while the remainder is active. Los Angeles

Crude Categories by Region

Source: Company reports

Refinery Utilization by Geography

Source: Company reports and KWMPMP Estimates

refineries tend to source heavy crudes from local California production and from the Canadian oil

sands, medium crudes from the ANS region and Middle Eastern imports, and light crudes from

South America and other global regions, and increasingly the Bakken.

Logistics Tesoro Logistics L.P. (NYSE: TLLP), a publicly traded master limited partnership (MLP),

completed its initial public offering in April 2011. TLLP charges fees for gathering crude oil and

for terminaling, transporting and storing crude oil and refined products for Tesoro and for third

parties. The partnership’s assets include the High Plains crude oil pipeline system in the Bakken

Shale/Williston Basin and the related trucking operations in the Bakken region that gather and

transport crude from well sites to collection points It also includes a common carrier products

pipeline running from Salt Lake City to Spokane, WA, and a jet-fuel pipeline running to the Salt

Lake City airport, 20 refined products terminals and storage facilities in the US Midwest and west,

four marine terminals in California, a rail-car unloading facility in Washington, a petroleum coke

handling and storage facility in Los Angeles, and other pipelines that transport products and crude

oil from TSO’s refineries to nearby facilities in Salt Lake City and Los Angeles.

TSO has a ~35% interest in TLLP following TLLP’s August 2014 public offering, including its

2% general partner interest, and owns 100% of the GP entity. TLLP’s financials are consolidated

into TSO as a variable interest entity and is reported as a separate segment. About 87% of TLLP’s

FY13 revenues were derived from Tesoro. In 2013, TLLP contributed 7.5% ($81 M) to TSO's total

operating income.

Company Location Status Crude Capacity Idle Capacity

Tesoro Los Angeles Active 363 0

Chevron El Segundo Active 269 0

Exxon Torrance Active 150 0

Phillips 66 Los Angeles Active 139 0

Valero Wilmington Active 85 0

Alon Paramount Idle 0 70

World Oil South Gate Active 9 0

Total 1,015 70

Source: Company reports and Energy Information Administration

Los Angeles Refinery Market

Operational Levers

The company plans on accomplishing performance objectives tha could deliver up to ~$700M in

incremental EBITDA. The company has three categories for EBITDA improvements. First, the

company sees $260-300M in FY15 synergies related to the BP Carson refinery acquisition, with

$430- 490M in total to be achieved by 2017. Next, multiple projects are under way to increase the

proportion of inexpensive “advantaged crude” throughput within the company’s California and

Alaska refineries, which also boast a product yield. Finally, the company plans to pursue broad

cost savings opportunities throughout the organization, such as general cost reductions within the

refinery system, supply chain management, optimization processes, OEMS, and Lean Six Sigma

Additional growth expected in the logistics business TSO is also pursuing EBITDA growth at

TLLP from future asset dropdowns and organic growth opportunities.

Retail Tesoro’s retail business markets gasoline, diesel fuel, and other merchandise items in the western

United States through company-operated retail stations as well as third party dealers and

distributers. TSO’s retail segment operated 586 TSO-operated stations and 1,682 jobber/dealer or

third-party stations, operating in 17 states, with total fuel sales of 3.2B gallons ($10.1B) in 2013.

TSO’s gasoline sales are 87% integrated into TSO’s refinery operations. The retail segment

accounted for 11% of TSO’s segment EBITDA in FY14E.

Brand Portfolio

Tesoro conducts retail operations under six brands, plus a master franchisee license. Tesoro, the

company’s legacy brand, operates throughout the Western United States, excluding California.

Along with its acquisition of the Wilmington refinery from Royal Dutch Shell in May 2007, TSO

acquired the Shell and USA Gasoline brands in 17 states, including California. In conjunction with

the acquisition of the Carson refinery and L.A. logistics assets from BP in June 2013, TSO acquired

the ARCO brand, which operates in AZ, CA, and NV, and the master franchisee license for the

Source: Company reports and Sell Side Estimates

Public Distributions

ampm brand. Separately in June 2013, the company acquired the Exxon and Mobil brands in seven

states, with market launch expected for all but MN (begun in 2013) in 2014.

Tesoro is pursuing gross margin enhancement across the value chain, including its retail operations.

The company should experience margin enhancement to be driven by gasoline integration and by

selling a higher percentage to its retail locations. The company has had a strong focus over the past

five years toward increasing its gasoline integration level between the refinery business and the

marketing business through brand acquisitions, increasing its integration level from 31% in 2009

to 87% in 2013. TSO intends to drive gross margin enhancement through a focus on premium

products within its portfolio and selective organic growth (ARCO in Southern California, Exxon

and Mobil in key regions).

Tesoro Retail Locations

Source: Company Reports

West Coast and Mid-Continent refining exposure:

Through the cycle, refining has been the most important segment for TSO, typically >80% of

segment EBIT. Refining was 81% of total segment EBIT in 2013 after dropping ~50% y/y versus

2012. TLLP is growing as a portion of profits, as the company drops down more assets and

continues to grow the business. Refining operates in three regions: California, the Pacific

Northwest, and Mid- Continent. While Mid-Continent has grown from ~20% of segment EBITDA

in 2005 to ~50% in 2013 on expanding margins, the West Coast (California and Pacific

Northwest) has traditionally been the most important region. TSO expanded further into the West

Coast in 2013 through its acquisition of BP’s 266kbpd refinery in Carson, CA.

Source: Company reports

Gasoline Marketing Integration

Refining EBITDA percentages by location

Source: Company reports and KWMP Estimates

Historically, TSO’s stock price has been correlated to West Coast margins per barrel, particularly

in California. That said, with the recently strong Mid-Continent margins and TSO’s Mid-Continent

refining exposure, stock performance has benefited somewhat, in our view (along with improved

execution on cost savings).

California Synergies The company has identified multiple projects that will help the company generate synergies from

its recent Los Angeles acquisition. The main areas are production, operating and feedstock projects.

The production optimization category includes the integration project to reduce emissions and

increase distillate production flexibility ($50-75M/yr in total), a physical pipe connection between

the facilities that will allow TSO to efficiently move feedstock across the facilities and fully utilize

conversion capacities (~$60M/yr in total), and fundamental yield optimization, allowing for higher

distillate vs. gasoline yields without capital investment ($35mm/yr in total).

Operating cost improvement synergies include improving utilization through a focus on reliability

and mechanical integrity, maintenance and personnel efficiencies, and engineering resource

efficiency (i.e. utilizing less third-party engineering resources).

Source: Company reports

Stock price performance and Mid-continent margin per barrel

TSO’s feedstock projects are aimed toward expanding the utilization of advantaged crudes within

each refinery. Presently, Mandan and Salt Lake City each use 100% advantaged crudes due to their

geographic locations. Anacortes now runs 70% advantaged crudes following the 2012 completion

of the rail unloading terminal facilitating the delivery of Bakken crude. Kenai, which currently runs

~25% advantaged crude from the Cook Inlet in Alaska, is targeted at ~2/3 advantaged crude

feedstock between the Cook Inlet and Bakken following the completion of the Port of Vancouver

project.

Due to the shift towards more advantaged crude, TSO expects its usage of WTI based crudes to

expand from 15% in 3Q13 to 38% in 2015, displacing ANS and crude imports. While advantaged

crudes such as Bakken can expand gross margin per barrel by providing cost savings versus foreign

and domestic alternatives, such crudes also provide an advantage in product yield. For example, in

its Anacortes refinery, TSO yields 68% high value products (gasoline, distillate) when running

Bakken crude vs. 53% for ANS, providing a margin boost of $3-5/bbl on average.

Port of Vancouver project In April 2013, TSO announced the formation of a 50/50 joint venture with Savage Companies to

develop and operate a rail-to-marine terminal in the Port of Vancouver, WA, with an initial capacity

of 120kbpd (TSO will have the right to the first 60 kbpd of throughput) and potential for up to 300

kbpd in total. The project, expected to be completed sometime in 2015, will allow TSO to rail

barrels into the port from the Bakken or from other advantaged Mid-Continent crude sources,

transfer the barrels to a domestic-flag vessel, and ship the barrels to the company’s refineries in

Kenai, Martinez, and Los Angeles.

Refinery Project Completion Date EBITDA Benefit/Year ($M) IRR

Mandan 10 kbpd crude capacity expansion Jun-12 45-55 65%

Mandan Diesel desulfurization unit expansion Jun-13 10-Dec 20%

Wilmington Yield improvement Nov-12 20-25 40%

Anacortes Bakken crude by rail Sep-12 160-180 220%

Salt Lake City Waxy crude project May-13, early ' 100 30%

Kenai, Martinez, LA Port of Vancouver loading facility 4Q14-4Q15 N.A. N.A.

Source: Company reports

Previous Cost Saving Projects

The value of the Port of Vancouver project can be illustrated by comparing the cost and yield of

Bakken crude railed to the Port of Vancouver and sent via ship to Los Angeles versus utilizing

ANS crude as an alternative. TSO estimates the rail cost of shipping Bakken to the Port of

Vancouver at $5.50-6.50/bbl, not including loading and unloading costs. However, the estimated

yield advantage of $3-5/bbl discussed above could make the project gross margin accretive. It is

also worth noting that TSO can typically get Bakken at a slightly cheaper price in the field, given

its gathering system advantage, relative to the hub price.

The project will be critical to get advantaged crude to California. In April 2013, Tesoro announced

a joint venture with Savage Companies to build a 360,000 Bpd rail-tomarine crude terminal at the

Port of Vancouver in Washington. This terminal should help Tesoro get around the difficulties with

permitting rail terminals in California by taking Bakken crude to the Port of Vancouver by rail and

then putting it in tankers to ship to California. TLLP already owns four marine terminals in

California, so Tesoro would be able to access the tankers with ease. Tesoro is expecting to invest

$75-$100 million in the project, with an estimated initial volume of 120,000 Bpd (60,000 Bpd

committed) and an in-service date in late 2015.

ANS Bakken Bakken Advantage

Crude Cost 99.5 89.5 14

Transportation to Refinery 0 13 -13

Total Cost to Refinery 105 104 1

Less Yield Advantage 3-5

Total Advantage' ~$4-6/bbl

Port of Vancouver Project map

Source: Company Reports

Advantage of the Port of Vancouver Project

Operational Diversity

One of the biggest advantages that Tesoro has is its operational diversity. Since 2010, TSO has

been able to improve its marketing volumes by 55%. The company has also been able to increase

its retail network and average throughput volume per station by 250% and 20% respectively. In

FY2014, it was TSO's retail segment, not its refining, that was the company's best-performing

segment, with a YoY increase of 41.1% in operating income. This can be attributed to favourable

market conditions, where the retail segment is benefiting from a demand increase for gasoline due

to low gas prices. Moreover, the Energy information administration (EIA) forecasts U.S. gasoline

consumption to be even higher in 2015 and 2016 than it was in 2014, translating into higher retail

volumes and margins. The retail segment provides a nice hedge for its more prominent refining

segment, which has experienced narrower margins lately due to the constriction in crack spreads.

Increasing Margins As many refiners, Tesoro should experience an increase in refining margins in the next coming

years. e. Cracking margins running along the Kern River increased 99.1% to $31.75 BOE/d on

February 23rd. In addition, cracking margins for Alaska North Slope spiked 118.8% to $30.85

BOE/d, and Arab Medium crude appreciated 142.4% to $28.09 BOE/d on the same day. On another

note, a sustained increase in gasoline consumption will continue to expand driving margins and

volumes, fueling TSO's retail segment. The company is already benefiting from the recent strength

in diesel and jet fuel, which should continue to persist in the near-medium term future.

One year Brent-WTI Spread

Source: Energy Information Administration

A strong supply of U.S. crude oil in the foreseeable future will keep refining costs historically low,

which will subsequently increase margins. Moreover, U.S. oil refiners possess a competitive

advantage over their peers across the Atlantic and elsewhere. They are the beneficiaries of low-

cost crude feedstock from an abundance of domestic supply. Furthermore, U.S. oil refineries

benefit from competitively priced natural gas due to booming shale output and a more developed

infrastructure. Looking forward, U.S. oil refineries may manage to augment utilization rates until

at least 2016, according to the EIA. Refinery costs of crude feedstock will continue to persist below

the cost of WTI until 2016 as more refiners find more advantaged feedstock from shale plays.

Competition Analysis

Operating Margins Tesoro has been able to generate the highest gross and EBITDA margins per barrel when compared

to the group average. The company has been and will continue to be able to maintain this

competitive advantage with its cost saving initiatives implemented in the past and those that it plans

to implement in the coming years.

The company is currently trading on par to its peers when analyzed on a P/E and EV/EBITDA

valuation metrics. The company is below the industry median when valued based on the

DACF/EV and FCF yield. The company also offers a dividend of 1.6% compared to a group

median of 3.2%.

Company 2013 2014 2015E 2016E 2013 2014 2015E 2016E

HollyFrontier 16.0 14.2 15.5 17.1 8.3 6.3 7.4 8.9

Marathon Petroleum 13.2 14.8 15.1 15.4 4.9 5.1 5.8 6.0

Phillips 66 9.9 9.4 9.5 9.6 3.6 3.5 4.0 4.0

Tesoro 17.5 18.0 18.5 19.0 9.0 9.5 10.5 11.0

Valero 9.7 10.3 10.6 11.1 4.3 4.7 4.9 5.4

Average 13.3 13.3 13.8 14.4 6.0 5.8 6.5 7.1

Gros Margin/bbl Operating Margin/bbl

P/E EV/EBITDA DACF/EV % FCF Yield

Company name Mkt Cap ($M) EV($M) 2014A 2015E 2014A 2015E 2014A 2015E 2014A 2015E Div.Yield

Holly Frontier 7,717 8,308 15.5x 12.8x 6.7x 6.0x 10.0% 11.3% 4.7% 6.4% 7.1%

Marathon Petroelum 27,203 32,985 11.5x 9.4x 5.6x 5.1x 11.8% 12.8% 5.0% 7.1% 2.3%

Phill ips 66 42,090 46,014 13.3x 11.7x 6.9x 6.1x 8.8% 8.2% 3.2% 0.4% 2.3%

Valero 31,803 35,067 8.0x 8.3x 4.5x 4.3x 17.0% 17.5% 6.6% 8.2% 2.3%

Maximum 42,090 46,014 15.5x 12.8x 6.9x 6.1x 17.0% 17.5% 6.6% 8.2% 7.1%

75th Percentile 34,375 37,804 13.9x 12.0x 6.8x 6.0x 13.1% 14.0% 5.4% 7.4% 3.5%

Median $29,503 $34,026 12.4x 10.6x 6.2x 5.6x 10.9% 12.1% 4.9% 6.8% 2.3%

25th Percentile 22,332 26,816 10.6x 9.1x 5.3x 4.9x 9.7% 10.5% 4.3% 4.9% 2.3%

Minimum 7,717 8,308 8.0x 8.3x 4.5x 4.3x 8.8% 8.2% 3.2% 0.4% 2.3%

Tesoro Corporation 11,299 17,081 12.0x 11.6x 5.9x 5.4x 10.9% 10.5% 4.8% 1.1% 1.6%

Tesoro Gross and Operating Margins vs. Peers

Source: Company Reports and Sell Side Estimates

Comparative Company Analysis

Valuation In order to value Tesoro, a sum of the parts valuation was used. We think that it is instructive to

look at the TSO upside opportunity using a sum of the parts valuation approach. Applying target

multiples to each business (refining, logistics and retail), we arrive at a Dec-15 price target of

~$109/share, using forward multiples on 2016E EBITDA.

Operating Assumptions We expect the company to increase its throughput by 5% from 2015-2017

Gross refining Margins have increased over the next years and should continue in the future

Utilization rates should increase slightly and then stabilize at 92% going forward

The retail segment should grow over the coming years organically but also mainly through

acquisitions. The major growth driver is the company continuing its retail integration

The logistics division should experience a lot of growth mainly due to synergies generated

with its Los Angeles acquisitions

Operating assumptionsProjected Fiscal Years Endig December 31st

2012A 2013A 2014A 2015E 2016E 2017E

Crude Throughput

California 339 387 409 889 469 914 493 410 518 080 543 984

Pacific Northwest 125 902 152 056 174 323 183 039 192 191 201 801

Mid-Continent 82 110 99 167 113 689 119 373 125 342 131 609

Total 547 399 661 112 757 926 795 822 835 613 877 394

Gross Refining Margins

California 4.5 5.5 6.0 6.5 6.5 6.5

Pacific Northwest 7.0 7.0 7.5 7.5 7.5 7.5

Mid-Continent 13.0 12.5 13.5 14.0 14.0 14.0

Total 6.5 7.1 7.7 8.1 8.1 8.1

Refinery Utilization Rate

California 83.0% 92.0% 91.0% 91.0% 91.0% 91.0%

Pacific Northwest 76.0% 76.0% 79.0% 80.0% 80.0% 80.0%

Mid-Continent 96.0% 89.0% 96.0% 96.0% 96.0% 96.0%

Total 85.8% 90.6% 91.7% 92.0% 92.0% 92.0%

Retail Growth Rate - 6.2% 15.5% 10.0% 10.0% 10.0%

Logistics Growth Rate - - 451.7% 20.0% 20.0% 20.0%

Opex % Gross Margins

Refinery 41.6% 38.2% 38.1% 39.3% 39.3% 39.3%

Retail 58.2% 64.9% 60.6% 61.2% 61.2% 61.2%

Logistics - 51.5% 64.1% 57.8% 57.8% 57.8%

Intercompany Eliminations % Refining - -1.1% -3.6% -3.6% -3.6% -3.6%

SG&A % Gross Margin 8.8% 7.1% 3.9% 6.6% 6.6% 6.6%

Depreciation % Gross Margin 12.7% 10.3% 8.6% 10.5% 10.5% 10.5%

Interest Expense % Gross Margin 4.7% 3.2% 3.3% 3.7% 3.7% 3.7%

Income tax expense 58.5% 13.6% 12.8% 28.3% 28.3% 28.3%

Statement of OperationsProjected Fiscal Years Endig December 31st

2012A 2013A 2014A 2015E 2016E 2017E

Gross Margin

Refining 3 046 864 4 230 111 5 318 048 5 890 657 6 185 190 6 494 449

Retail 469 000 498 000 575 248 632 773 696 050 765 655

Logistics - 99 000 546 197 655 436 786 524 943 828

Intercompany Eliminations - (48 000) (218 000) (220 000) (220 000)

Total Gross Margin 3 515 864 4 779 111 6 221 493 6 958 866 7 447 763 8 203 933

Operating Expenses

Refining 1 269 000 1 615 000 2 026 988 2 315 878.53 2 431 672 2 553 256

Retail 273 000 323 000 348 598 387 400 426 140 468 754

Logistics - 51 000 350 000 378 825 454 589 545 507

Intercompany Eliminations 2 000 (46 000) (189 000) (209 350) (219 818) (230 809)

Total Operating Expenses 1 544 000 1 943 000 2 536 586 2 872 753 3 092 585 3 336 709

SG&A 310 000 341 000 242 729 460 534 492 889 542 932

Operating Income 1 661 864 2 495 111 3 442 178 3 625 578 3 862 289 4 324 291

Depreciation & Amortization 445 000 490 000 533 763 730 431 781 747 861 118

Other Income (296 000) 51 000 5 000 - - -

Interest Expense 165 000 151 000 202 699 257 725 275 831 303 837

Earnings before Taxes 755 864 1 803 111 2 700 716 2 637 423 2 804 711 3 159 337

Income Tax Expense 442 000 246 000 345 513 746 501 793 851 894 225

Noncontrolling Interest 27 000 42 000 88 666 100 000 100 000 100 000

Net Income 286 864 1 515 111 2 266 537 1 790 921 1 910 860 2 165 112

Diluted Shares Outstanding (000s) 141 502 137 361 131 165 128 079 126 082 126 000

EPS - $11.03 $17.28 $13.98 $15.16 $17.18

EBITDA

Refining 1 777 864 2 615 111 3 291 060 3 574 778 3 753 517 3 941 193

Retail 196 000 175 000 226 650 245 372 269 910 296 901

Logistics - 48 000 196 197 276 612 331 934 398 321

Sum of Parts Valuation

Refining For Refining, we believe that a 0.5x discount to the long-term historical group average multiple of

~4x is appropriate, given the challenged operating and regulatory environment in California, which

would imply a target value of $13.9B. Also, we estimate that every turn of EBITDA multiple is

worth ~$12-13/share.

Retail For Retail, we looked at recent comps that have spun off their retail businesses, such as CST

Brands and Murphy USA, in addition to other public convenience store players, such as Casey’s,

Couche-Tard, and Pantry. These companies currently trade at ~9.0x forward EBITDA, which we

conservatively applied a 1x discount, implying a value of $2.6B for TSO’s retail business. We

estimate that each turn of EBITDA multiple for Retail is worth ~$2/share to TSO’s stock price.

2016

Segment Corporate EBITDA Forward Implied

EBITDA Allocation Post Corporate Multiple Value

Refining 3 753 517 (219 818) 3 533 700 3.5x 13 137 310

TLLP LP 269 910 - 269 910 13.0x 3 508 826

Retail 331 934 - 331 934 8.0x 2 655 474

Total 4 355 361 (219 818) 4 135 543 19 301 610

Net Debt 2 264 000

Public Equity Value of TLLP 3 132 000

Equity Value 13 905 610

Diluted Shares (000's) 122 000

Implied Price/Share 113.98

Current Price 91.15

Implied Upside 25.0%

2014A Dividends 1.43

Dividend Yield 1.6%

Implied Total return 26.6%

TLLP We valued TLLP at a combination of the public market enterprise value of the LP entity and 15x

2015E GP distributions. We note that the 15x distributions is a discount to TSO’s 25x view and

the comparable company average 20x, given that TSO has lower built-in distribution growth than

many of its refining peers.

Company Market EV/EBITDA

Cap 2013A 2014A 2015E

CST Brands 2,646 9.3x 10.0x 9.3x

Murphy USA 2,588 8.4x 8.4x 9.2x

Casey's 2,757 10.9x 9.3x 8.5x

Couche-Tard 20,838 17.4x 13.1x 12.4x

Pantry 482 7.0x 7.0x 6.4x

Average 10.6x 9.6x 9.2x

Company Market EV/EBITDA

Cap 2013A 2014A 2015E

MPLX 4,710 29.1x 25.4x 22.0x

PSXP 5,196 40.4x 28.2x 19.5x

TLLP 3,716 15.8x 13.5x 11.3x

VLP 2,962 42.2x 31.1x 25.2x

Average 31.9x 24.6x 19.5x

Appendix

Appendix 1: Management Team Name Title Background

Gregory J. Goff President and

Chief Executive

Officer

Gregory J. Goff was named President and CEO of Tesoro Corporation in May 2010. Before

joining Tesoro, Mr. Goff served various management positions beginning 1981 at

ConocoPhillips Corporation most recently as Senior Vice President, Commercial from 2008 -

2010. He was President of ConocoPhillips specialty businesses and business development

from 2006-2008, President of ConocoPhillips U.S. Lower 48 and Latin America exploration

and production business from 2004 – 2006, President of ConocoPhillips Europe and Asia

Pacific downstream business from 2002 – 2004, Chairman and MD of Conoco Limited (a

United Kingdom based refining and marketing affiliate) from 2000-2002, and director and

CEO of Conoco JET Nordic from 1998-2000. He has served on the National Advisory Board

of the University of Utah Business School, Chevron Phillips Chemical Company and is a

member of the downstream committee of the American Petroleum Institute. From

2008 – 2010, he also served as a Director of DCP Midstream GP LLC. Mr. Goff received a

bachelor of science from University of Utah in 1978 and an MBA from the University of Utah

in 1981.

Keith Casey Executive Vice

President,

Operations

As the principal operating officer, Mr. Casey oversees Tesoro’s refining, marketing, logistics

and marine functions. Casey joined Tesoro in 2013 as Senior Vice President, Strategy and

Business Development. He also serves on the Board of Directors for Tesoro Logistics. Prior to

joining Tesoro, Mr. Casey served as Vice President, BP Products North America, at the Texas

City Refinery, a multi-billion dollar facility and third largest in the U.S. He previously held

roles with Motiva Enterprises, Shell and Praxair. Mr. Casey holds a Bachelor of Science

degree in metallurgical and materials engineering from California Polytechnic State

University, San Luis Obispo.

Steven Sterin Executive Vice

President and

CFO

Mr. Sterin will join TSO in October 2014 as the EVP and CFO. Prior to Tesoro, Mr. Sterin

was senior vice president and chief financial officer for Celanese Corporation, a global

technology and specialty material company, for seven years. During this time, he was also

president of Celanese’s Advanced Fuel Technologies business. Mr. Sterin joined Celanese in

2003 as director of finance and controller for the company’s chemical business and also served

as corporate controller and principal accounting officer before being appointed CFO. Prior to

Celanese, Mr. Sterin spent six years with global chemicals company Reichhold, Inc. in a

variety of financial positions, including director of tax and treasury in the Netherlands, global

treasurer and vice president of finance for one of the company’s divisions in North Ca

Appendix 2: References

1. JP Morgan 2014 Equity Research – Initiating Coverage

2. RBC 2014 Equity Research – Initiating Coverage

3. 2015 Corporate Presentation – Scotia Bank Howard Veil Energy Conference

4. 2014 Corporate Presentation – Bank of America refining Conference

5. 2014 10K and MD&A

6. 2013 10K and MD&A

7. 2012 10K and MD&A