David Fessler (Money Morning):

By the time 2009 is in the books, the record will show that solar energy stocks endured a tough year. That’s hardly a surprise, given that so many Wall Street analysts (yours truly not among them) lambasted the sector for much of the year.

Analysts also expect the carnage to continue into 2010, and are predicting losses for as many as half of the world’s solar companies.

The “thought process” of a Wall Street analyst – and I use that title loosely – goes something like this:

• Analysts first suggest that a “huge” oversupply of polysilicon (the raw material used to make silicon-based panel assemblies) exists. But this is only partially true, as increasing panel sales are rapidly eating into this oversupply.
• The analysts’ next miscue is over new thin-film panel technologies. They predict companies producing panels based on the new thin-film designs are doomed because the oversupply of polysilicon will keep poly-based panel prices too low for the thin-film guys to compete.

Talk about a myopic view if there ever was one. I suspect many of these analysts will be eating crow instead of turkey for Thanksgiving dinner next year.

In the meantime, allow me to outline the real story on the solar energy sector…

Click here for the rest of Mr. Fessler’s analysis at Money Morning.

Baltimore — (TFN): We all have a friend like him. For me it’s a guy named Greg. He has some great ideas and his entrepreneurial spirit runs deep, but for some reason, his plans never seem to make it to fruition. Somewhere from the drawing board to the production line, he runs into a debilitating snag.

Most of the time, it’s money.

He’s got great ideas but nary a penny to his name. That’s why I told him to ring up old Uncle Sam… collect. Washington’s handing out all sorts of dollars these days. He might as well put his hand under the waterfall.

According to the Wall Street Journal, the Department of Energy is handing out some $40 billion just to the so-called “clean energy” sector. Greg needs to paint a tree on his latest invention, call it organic and break into 21st century politics, er, business.

From here on out, it’s not what you know, it’s who you know. With Obama acting as economic maestro-in-chief, it’s a whole new world for us business folks.

Which brings me to a sore subject. You see, I recently told Hot Stock Confidential members to buy shares of a tiny little up-and-comer named Raser Technologies (NYSE:RZ).

Now, before I go any further, I don’t want to hear any complaining that I only talk about my winning plays in Notes, because this one was a loser. A big fat flop. Right now, we’re down 45%. It was one, if not the worst recommendations I made this year.

But I’m not selling. Even though I got plenty of heat from internal and external “forces,” I am still not ready to suck it in and lock in the loss.

I’m not holding out because the company’s got a breakthrough product or is about to get bought out. I’m holding on because Uncle Sam is ready to cut Raser a big ole’ check.

When I initially recommended the company in late August, headlines were abuzz with “green” spending. But then, just as suddenly as it started, it stopped. Congress switched gears to healthcare and Raser shareholders were left in the dust.

But Washington never stays in one place too long. It makes for an easy target. So once again, the clean energy industry is heating up. The article in today’s Journal proves it.

With Stimulus 2.0 ready to be released and the DOE spending like an eighteen-year-old who just unlocked his trust fund, this is a fantastic time for Raser and its geothermal electricity production.

After all, just last week it announced it was applying for a Treasury Department grant that could put $33 million into the company’s coffer.

For a firm with a market value of just $90 million, $30 million can do great things.

This play may not have followed a traditional route and is certainly a move that would make any financial advisor soil his suit, but in today’s financial environment, when the government acts as the lender of choice, traditional rules are out the window.

While fundamental investments still have long-term merits, for us short-term traders and especially us contrarians, some of the best investment opportunities can be uncovered by following the White House press pool.

*** Speaking of money, how about Exxon’s big deal today? For us contrarians, the $31 billion, all-stock deal proves the world’s largest oil producer believes its stock is overpriced and ready to fall.

If you’ve read my work for any length of time, you likely know that I am a big fan of signaling theory. According to the common-sense notion, Exxon’s unwillingness to use any of its massive pile of cash is a sign that company executives feel a $69 share of the company is worth less than $69 in cash.

It is no wonder we are watching shares drop by more than 4.7% today. In the long run, today’s news will boost Exxon’s performance. But in the short term, investors have an awful lot to think about.

By far, the biggest news surrounding this story is not what it will do for Exxon or XTO shareholders, but what it will do to the natural gas market.

It’s exciting stuff, especially for those of us that just racked up triple-digit gains thanks to the industry’s recent meanderings. I’m talking to you TFN Strategic Trader members.

Here’s what I wrote for the TFN site today:

“You don’t become one of the world’s largest and most profitable companies by making dumb moves. Exxon Mobil (NYSE:XOM) proves it once again.

“The Street is buzzing today thanks to news that Exxon is printing some $31 billion worth of new shares in order to purchase XTO Energy (NYSE:XTO), one of the nation’s natural gas producing giants. It’s a major deal that has hearts skipping across a variety of sectors.

“Of course, nobody is as excited as XTO shareholders. They woke up to news of a buyout worth a 17% premium to Friday’s closing price.

“Shares of the oil and gas producer slipped by double-digit proportions over the past few months as natural gas prices slide. But now that demand is rising and gas prices are following suit, Exxon officials saw it was time to make their move. With XTO prices reaching short-term lows, Exxon made its move.

“Now that a major non-conventional gas player is making headlines, investors have their eyes on all sorts of potential buyouts. It’s almost impossible to find a company in the energy industry not trading in higher territory today.

“Two stocks you will hear a lot about over the next couple of weeks are Chesapeake Energy (NYSE:CHK) and Range Resources (NYSE:RRC).

“So far today, Chesapeake is up by over 6%, with shares trading close to $25.50 each. The company, with major holdings in all of the popular shale regions, has been a long-term target of buyout rumors. Maybe this time the speculators will be right.

“But my money is on Range Resources. It is a major player in the Marcellus region that just happened to announce significant expansion in the area this morning. Coincidence? Doubt it. It looks more like advertising.

“Range is the right size for a buyout. With a current market value of $7 billion and another $3 billion or so in debt, a buyout could come with a price tag of just over a third of Exxon’s purchase. Whoever decides to grab the company (think Shell or BP) would automatically get more than 180 Mmcf of daily gas production out of the Marcellus region.

“Of course, this is a long-term play. With gas prices plunging to ultra-low territory in recent months, any company purchasing gas assets now has a long-term outlook. With non-conventional plays hotter than a barroom pistol, major producers like Exxon are flocking to the sector in hopes of finding larger profits than their current low-margin deepwater prospects.

“For all of you fans of deepwater drilling, that is bad news, even horrid.”

Read why here.

*** Hey, lookie there. Gold’s up today. With word that Congress is ready to budget yet another couple trillion bucks, the dollar’s a tad bit weaker today.

As I write, gold is up by $3.70 per ounce and the dollar’s down just $0.0019 against the euro. Doesn’t look like buyers of either asset have much conviction.

Today’s just a short-term turnaround in the recent trend. Expect more strength from the greenback and more weakness from the gold market. By the time we sing Auld Lang Syne in a couple of weeks, gold will be trading for $1050 per ounce. That’s when you should be a buyer again.

David Fessler (Investment U):

By the time 2009 is in the books, the record will show that solar energy stocks endured a tough year. Hardly surprising, with many Wall Street analysts (yours truly not among them) lambasting the sector for much of the year.

What’s more, they also expect the carnage to continue into 2010, with losses predicted for as many as half the world’s solar companies.

The analysts’ “thought” process – and I use that term loosely – goes something like this:

• First, they suggest that a “huge” oversupply of polysilicon (the raw material used to make silicon-based panel assemblies) exists. But this is only partially true, as increasing panel sales are rapidly eating into this oversupply. 
• The analysts’ next miscue is over new thin-film panel technologies. They predict companies producing panels based on the new thin-film designs are doomed because the oversupply of polysilicon will keep poly-based panel prices too low for the thin-film guys to compete.

Talk about a myopic view if there ever was one. I suspect many of these analysts will be eating crow instead of turkey at Thanksgiving next year. Here’s the real story on the solar energy sector…

Note to Experts: Refill Your Glasses

Before I go any further, let me say that some solar energy companies will lose money in 2010. Others won’t make it at all. But that’s normal in any competitive environment.

But the experts need someone to refill their half-empty glasses, so I’ll play the role of bartender.

The truth is that the solar enery sector – particularly thin-film panels – is growing at a rapid pace. It’s one of the reasons why Trony Solar Holdings Company Ltd. (NYSE: TRO) is expected to go public in the next few weeks. Trony is China’s largest manufacturer of thin-film based solar modules.

Its IPO – underwritten by JP Morgan (NYSE: JPM) and Credit Suisse (NYSE: CS) – is expected to raise over $200 million. And it’s oversubscribed, too. That doesn’t sound like an industry in trouble to me.

And it certainly doesn’t sound like an industry that’s doomed to replicate the 1980s, when 400 solar panel manufacturers got whittled down to just five as the market collapsed.

The market for solar photovoltaic panels (those that produce electricity) is increasing rapidly. All the industry needs is a little change in perception…

Click here for the rest of Mr. Fessler’s analysis at Investment U.

If NRG Energy Inc. (NYSE: NRG) were an athletic prospect, scouts would rate it as a “triple threat.” That’s because the Princeton-based wholesale power generator is involved in all three of the key energy sources of the future: Solar, wind and nuclear.

And that’s only part of the reason I like this stock.

Growing profit margins and earnings momentum add to the energy company’s appeal – and a rebound in U.S. economic activity hasn’t even begun in full.

When NRG announced its second-quarter results a few weeks ago, the company said that its profits tripled from a year ago – eclipsing Wall Street estimates and setting a new record. It also boosted its earnings guidance for all of 2009, and increased its stock-buyback target from its previous $330 million worth of its shares to $500 million.

Income from continuing operations was $432 million – a marked improvement over last year’s $41 million loss.  And its recent acquisition of the Texas retail-energy business of Reliant Energy Inc. [now RRI Energy Inc. (NYSE: RRI)] is starting to pay off.

In two months the tie-up has already delivered $200 million of the planned $400 million in adjusted earnings before income taxes, depreciation and amortization (essentially a cash-flow metric that professional investors refer to as “EBITDA”) gains for the year.  With disciplined management this acquisition should outperform its estimated gains.  This analysis is being recognized as we speak by the market, with unusual January call option activity in RRI stock last Friday.

NRG has interest in 44 power plants with 24,005 megawatts (MW) net ownership, most of which is in the United States. Plants in Texas and the Northeast account for almost 18,000 MW, giving the company positioning in fairly strong markets where environmental, but NRG also has operations in Australia and Germany.

The company distinguishes itself by having operating margins that are roughly double that of its peers – the product of its efficient fleet composition and prudent active energy price hedging policies. The hedges NRG currently has in place are likely to outperform analysts’ estimates, as well. That’s because no analyst wants to be caught over-estimating upside, especially in volatile markets like energy futures. So, Wall Street consistently undervalues the expected value of these hedges, which the firm carries on a mark-to-market basis. That was the case in the second quarter.

With respect to the economy, industrial sector inventories are very low, meaning they will need to be replenished in the third quarter.  The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” gave a nice boost to industrial production, and some signs of stability and even some gains – let’s cross our fingers –can be seen in some areas of the housing market.

We’re by no means out of the woods, yet, but U.S. gross domestic product (GDP) did better than expected in the last quarter – shrinking by just 1% – and is likely to beat analysts’ expectations in the third quarter as well. That’s good news for NRG because the third quarter is traditionally the most profitable quarter of the year for utilities. Prices should firm up, benefiting this company’s already stellar return on investment (ROI).

And in addition to being well positioned to profit in the short-term, NRG is an outstanding long-term play because it’s ready to capitalize on the next stage of “green” energy development: low carbon emissions. After all, green is the color of money.

The company’s natural-gas, new and existing commercial nuclear, and new and very large wind-and-solar-power projects are sure to benefit longer term from the move towards environmentally-friendly forms of energy generation.

With total liquidity of $4 billion, NRG is in an impeccable position to develop its planned projects and take advantage of small opportunistic acquisitions, should they appear.  The company has a very prudently managed balance sheet and a shrewd growth management discipline, which is an invaluable attribute in adverse economic conditions where cash is king.

And let’s say that all of these advantages that we have outlined here have not gone unnoticed by the competition:  Two companies in the last three years have attempted to acquire NRG.  Most recently, Exelon Corp. (NYSE: EXC) attempted to buy NRG outright. And even when the takeover attempt was rebuffed, NRG stock did not suffer. Exelon has since backed off from its acquisition attempt.  That stock-price stability reflects strong investor confidence in management’s execution.

At Friday’s closing price of $27.50, NRG’s stock was still down about 30% from its 52-week high of $39.09 – just one of several reasons it still has room to rise, even after a scorching 91% run from its 52-week low of $14.39.

The stock is trading at a low 10 times forward earnings, has been consistently above its 200-day moving average since mid-July and is oversold by many proprietary measures.  This stock could be ripe for a strong upward move as we approach the end of the year.  What’s more important is that the intrinsic long-term value of the company is undervalued at these prices.

Recommendation:  Buy NRG Energy Inc. (NYSE: NRG) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in NRG Energy Inc.

Source:Buy, Sell or Hold: Why NRG Energy Inc. (NYSE: NRG) is the Energy Sector’s “Triple-Threat” Profit Play ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-why-nrg-energy-inc-nyse-nrg-is-the-energy-sector%e2%80%99s-%e2%80%9ctriple-threat%e2%80%9d-profit-play/20238/feed 1 http://www.contrarianprofits.com/articles/the-ishares-barclays-tips-bond-fund-is-a-good-way-to-brace-for-imminent-inflation/18728 http://www.contrarianprofits.com/articles/the-ishares-barclays-tips-bond-fund-is-a-good-way-to-brace-for-imminent-inflation/18728#comments Mon, 06 Jul 2009 17:30:48 +0000 Horacio Marquez http://www.contrarianprofits.com/?p=18728

It is high time for our political leaders to make some key decisions.  And that translates into large uncertainties for investors that have held the market in a range and with low volume. We do not know whether “Cap and Trade” legislation will pass the Senate and we do not know whether and any healthcare bill will pass through Congress, or what that bill might entail.  And these two issues are paramount for the future of America.  

As we discussed earlier, cap and trade could cause incremental costs in energy for all of the United States, particularly in all carbon-based generation of electricity.  Increasing these costs will make carbon-based energy less competitive with alternative sources, like solar and nuclear.  The benefits…

Or as Jack Ablin, Chief Investment Officer at Harris Private Bank puts it, “A lot of these deals are motivated by self-defense.”

But they’re wrong.

Even though this Monday wouldn’t even make the cut for the top 20 deal days during the last takeover boom (in 2007), it’s more than just a function of survival or some freak bear market anomaly.

Another takeover boom is brewing. Here’s how I can be so sure…

Takeover Boom Catalyst – Private Equity

We all know the catalyst behind any serious takeover boom is private equity. Because when they’re flush with cash, competition for targets heats up and bidding wars ensure.

• We also know such activity sputtered along in the first quarter.
• Only $8.7 billion worth of private-equity-led deals were completed, compared to the $57.6 billion in the first quarter of 2008, according to Dealogic.
• Moreover, private equity fundraising – the fuel for future activity – also fell off the cliff, dropping 81%, to its lowest level in over five years.

But those are only the headlines. And sadly, most investors stop there. Digging deeper, though, reveals a new trend is unfolding.

The number of firms hitting the pavement to raise new funds is on the rise. In January, there were 1,624 funds trying to raise $889 billion, a 25% increase from last year… and a 43% increase from 2007.

And they’re enjoying success.

Morgan Stanley raised a record-setting $1.14 billion for its Private Markets Fund IV. Abbott Capital Management also raised more than $1 billion for their latest fund.

In other words, the next takeover boom is incubating. And it makes perfect sense. Despite such a challenging environment, the smart money knows it’s time to make a deal…

Stock valuations rest at historically low levels. Financing, although hard to come by, is similarly cheap. And thanks to the bear market, every manager is amenable to a deal. In many cases, it’s their only hope at quickly restoring shareholder value.

So if you’re not preparing for the imminent takeover boom by investing in potential takeover targets now, you should be. After all, the institutional money is getting ready. And history proves the premiums will be rich and the opportunities plentiful.

Of course, half the battle is being prepared, like a Boy Scout. The other half is knowing where to look, a la G.I. Joe.

An Imminent Takeover Boom In These 3 Sectors

In my opinion, you should focus on the following three sectors because they will attract both private equity suitors and publicly traded competitors. Thus, bidding wars will erupt and premiums paid to shareholders will be the greatest.

• Health care (specifically drug makers) – All major pharmaceutical companies are scrambling to replenish pipelines. Sure $150 billion worth of deals have already been announced this year. But the largest drug makers are still sitting on a $100 billion in cash and need to replace $84 billion in annual sales.
• Energy – As famous oilman T. Boone Pickens famously acknowledged, it’s much cheaper to drill for oil on Wall Street than in the ground. The pullback in oil and natural gas prices should entice cash-rich international giants to try to replenish reserves on the cheap.
• Technology – This is another cash-rich sector with cheap valuations and technologies becoming more essential to everyday life. At the same time, the industry heavyweights are struggling to grow organically. Acquisitions are the only quick fix. Yet private equity shops are equally eager to pounce on the high margin, high penetration products in this sector.

Next week, I’ll show you how to do identify the most attractive takeover targets in each sector. I’ll even include three companies at the top of my list. So stay tuned.

Source: The Coming Takeover Boom: 3 Sectors Ripe for Mergers & Acquisitions

The 30-year anniversary of the Three Mile Island accident – which occurred near Harrisburg, Pa., in the in the predawn hours of March 28, 1979 – has obviously resurrected some of these discussions. But thanks to these deep-seated and growing concerns – virtually every one of them sparked by globalization – the nuclear power industry is moving ahead with plans to build a string of new reactors in the U.S. market, The Washington Post reported this weekend…

The revival faces many uncertainties, but will also re-open a vista of investment opportunities for energy-sector investors.

The crisis that grew out of the TMI accident, in which worker error and equipment malfunctions triggered a partial meltdown in the core of one of two reactors at the Pennsylvania power plant along the Susquehanna River, was long believed to have forever ended any chance that new commercial nuclear plants would be built in the United States.

But nuclear power is now making a comeback – largely out of necessity.

The United States generates about one-fifth of its electricity from the 104 reactors now in operation – all built before the TMI accident. Utilities have applied to build 26 new reactors, many of them expansions of existing nuclear facilities, and the Nuclear Regulatory Commission (NRC), which has to approve the plans, says the first approvals could come by 2011.

It could take nearly a decade before any of these approvals leads to a finished, operational nuclear plant.

But the revival faces tough barriers – including the multi-billion-dollar price tags of a nuclear plan today. Jone-Lin Wang, managing director of the global power group at Cambridge Energy Research Associates, a consulting firm, told The Post that plant estimates “have gone up substantially, compared to just a few years ago.”

A 1,000 megawatt unit could cost $6 billion to $8 billion; since many plans call for building twin units as part of a single project, that could push the total cost up to $16 billion.

“For some of the companies going through the licensing process, that’s the same size as their entire market cap,” she told newspaper. And in today’s ultra-tight credit market, that could be a deal breaker.

Despite these uncertainties, the industry is growing again, particularly in Western Pennsylvania – a region long associated with nuclear businesses because it was the headquarters of one-time commercial-nuclear-power heavyweight Westinghouse Electric Corp., now part of Japan’s Toshiba Corp.
The Pittsburgh-based Westinghouse unit still builds and maintains reactors [as does the United States’ General Electric Co. (GE)], added 1,400 workers last year to handle the influx of business, and says it will keep adding 650 a year for the next half a decade.

“The recession is something everyone is paying attention to, but it doesn’t seem to be having a significant impact on us,” company spokesman Vaughn Gilbert told The Post.

Gilbert said that Westinghouse now has contracts to build six reactors in the United States, including a deal it signed in January.

Source: U.S. Nuclear Power Sector to Rebound; Will Create New Profit Plays for Energy Investors

You see, this past Tuesday, his Investment U article caught my attention. In case you missed it, it was written about green energy. In it, Louis makes an argument for a “green energy super-bubble” that could burst in as little as two or three years, leaving unwary alternative energy investors in the lurch.

In his article, he cites four conditions that exist that make alternative energy ripe for a bubble. Those conditions may indeed be forming, but in and of themselves won’t cause a “speculative bubble.” In this case, there’s definitely more to the story.

The Defense of Alternative Energy & Green Investing

Louis: “The legislation is in place, and more is on the way.”

You’ll get no argument from me that Bush’s foray into increased ethanol production was misguided at best. But unlike ethanol, solar, wind and geothermal tax credits have been the catalysts that have energized those respective industries.

Improvements in technology have resulted in generation costs on par with – and in some cases, below – conventional fossil fuel sources. And with regard to solar in particular, costs per watt are on track to drop another 50% in the next few years. And in spite of the lower costs, industry margins will be in the 35% to 50% range, three times what they are today. That’s a recipe for increased earnings if I ever saw one.

Louis: “Money is already pouring into the sector.”

The $200 billion that Louis said flowed into the sector in the last two years is about right for a capital-intensive business like alternative energy. If it weren’t flowing into alternative energy development and deployment, where else in the energy sector would it go?

To pay for higher oil, for one, but perhaps it’s easier to describe where it won’t be going:

• No one wants a fossil fuel plant in their backyard (few are even planned, let alone being built), and you can forget about any new nuclear power plants here in the United States.
• Only a few are even in the permit stage (a 10-year process in and of itself), construction can take 10 to 15 years, and cost $15 to $20 billion. In June 2008, Moody’s estimated that the cost of power produced by a nuclear plant might possibly exceed $7 per watt, 10 times that of solar’s $0.70 per watt. And then there’s the spent fuel issue, decommissioning, etc.

Plenty of Room to Up Spending on Alternative Energy

Given that the United States alone spends over $500 billion every year on foreign oil, there’s plenty of room to up the spending on alternative energies like wind power.

Besides, we don’t really have a choice; cheap energy’s the key ingredient for economic growth. The problem with coal, oil and natural gas is that they are all finite resources, and we’ve already used all the best deposits (those with the highest energy content). Combine that with oil prices that will likely be closer to $100 a barrel by the end of the year, reigniting interest in alternatives.

Louis: “Tough credit conditions actually encourage more speculation.”

I’d argue that it’s really investment we’re talking about, not speculation. Because of the tax credits mentioned earlier, many start-ups already exist – particularly in the solar sector – where no less than 143 companies are currently playing in the thin-film segment of the industry.

There’s no question that they won’t all survive. But those that do will have viable, long-term business supplying the world with much-needed alternatives to fossil fuels.

Louis: “Green is the new black.”

Here I whole-heartedly agree, but for a different reason…

A Paradigm Shift Is Underway In Alternative Energy

There’s a paradigm shift underway in the alternative energy sector. Fossil fuels are on their way out and green is on the way in. It’s going to be a 20- to -30-year process, and that’s why it’s destined to be such a great opportunity for investors.

It’s not just a “U.S. social responsibility” thing, either. In fact, it’s just the opposite. Our alternative energy roadmap is far behind those of many other nations. Take Portugal, for instance, where over 60% of their energy comes from renewable sources. Their goal? 100%. China and Germany also have aggressive alternative energy generation plans underway.

And because of all the government tax incentives dangled in front of the myriad companies, cost-effective solar panels and wind generators are already in use, generating power that produces no greenhouse gas, and more importantly, don’t use a drop of oil when running.

Here’s the bottom-line: The global need for cheap energy is so monumental, alternative energy is destined to remain a target-rich environment for many years to come. Will some companies be better investments than others? Of course… just like they are in any other sector.

But a bursting bubble in two to three years? I don’t believe it. Actually, a mini one burst last year when oil dropped from $147 a barrel to where it is today, driving many solar, wind and geothermal stocks down as much as 80%. The valuations that these companies are sporting now are, in many cases, as low as they’ve ever been.

And that has helped to set up what could be one of the best sectors to invest in moving forward… for decades to come.

One thing you can be sure of: Both Louis and I will be watching it all unfold with an eye (or two, in this case) towards providing you with some great ideas for investing… and maybe for a few bragging rights.

Source: Alternative Energy: Why You Can’t Ignore “Green” Investing

This from Katherine:

While most oil companies continue to report less than desirable earnings results, one refiner recently reported improved refining margins, announcing a 51% increase from one year ago.

Based in San Antonio, Tesero Corp. (NYSE: TSO), one of the leading independent refiners and marketers of petroleum products, reported quarterly profit of $97 million, compared with a loss of $40 million just a year earlier.

Yes, that’s in spite the precipitous fall in oil prices.

Other areas of the company’s operations saw an increase as well, including its operating income, which was $196 million higher than the fourth quarter of 2007. This was in part due to success in its Hawaii and California regions, as well as improved results in retail.

Increased crude recipients in Los Angeles were partly responsible for the success in Tesoro’s California region. And a 10% increase in heavy crude helped its Hawaiian region report favorable earnings.

“The actions we’ve been taking since late in 2007 have positioned the company to succeed even in this weak market environment,” said Bruce Smith, Tesoro’s Chairman, President and CEO.

“While falling commodity prices did benefit our wholesale and retail marketing channels, the capital and non-capital initiatives we implemented beginning in early 2008 have enhanced our ability to deliver substantial and sustainable improvements in our capture of the available margin, and I am pleased to see these successful efforts reflected in our fourth quarter results.”

Tesoro was able to increase crude flexibility and distillate production, which helped its margin realization. It took great pains to take full advantage of production, which led to a 4% increase in diesel and jet fuel compared to 2007’s fourth quarter.

Another important aspect of Tesoro’s accomplishments in such an otherwise dreary market was its ability to decrease costs. Direct manufacturing costs were $248 million in the fourth quarter compared to $300 million in the third quarter.

Capital spending for the entire year was $724 million, down significantly from the $932 million it spent in 2007. It says it expects its expenses for 2009 to be around $600 million, an even better improvement than it already reported.

“While the strength in first quarter West Coast margins has been a pleasant surprise, we plan to continue to follow our 2009 business plan which is based on industry benchmark margins that are lower than 2008, and our expectation that we will realize continued improvement in margin capture. Our program of non-capital objectives and benefits of our 2008 income capital spending is resilient and continues to provide the platform for our organic growth opportunities,” said Smith.

The company has obvious investment merit. To endure the fall in oil prices from $147 a barrel to under $40 – yet still improve margins, is significant. If anything, Tesoro represents a great way to keep your portfolio diversified with exposure to the energy sector.

Source: Tesoro Corporation (NYSE: TSO): Stock of the Day