One of the major questions on investors' minds -- besides when the Federal Reserve will stop kicking the can down the road and who the next occupant of the White House will be -- is whether oil has reached a bottom.
While we can't be sure yet, it's possible oil bottomed earlier this year and is now in a trading range with a lower boundary near $40 a barrel.
But whether oil has bottomed is really more of an important question for futures traders who buy and sell the commodity. For stock market investors, a better question to ask is whether an energy stock's current price reflects oil's decline or whether a company has adapted to lower oil prices.
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One name that gets a resounding "yes" to both of these questions is Tesoro (NYSE: TSO).
The stock fell more than 40% from its November peak to its February lows -- a sizeable enough drop that we can reasonably say it reflects the reality of lower oil prices -- and has since regained roughly a quarter of those losses.
Tesoro also seems to have adapted to the lower-price environment remarkably well. Thankfully, as a refining and marketing company, it has less exposure to the price of oil than an exploration company.
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The oil refiner operates six refineries in the western United States with a combined capacity of approximately 900,000 barrels per day. These refineries are an important asset that few energy companies have. Since the early 1980s, the number of refineries in the United States has dropped from around 300 to only 140 today.
The company also owns and operates a network of approximately 3,500 miles of pipelines, as well as a handful of natural gas processing complexes, and its retail operations include almost 2,400 gas stations.
Tesoro's integrated business means it makes money at nearly every step of the process. Other companies pay TSO to transport oil and natural gas from the oil fields to the refineries through its extensive pipeline system. TSO then refines the oil into crude byproducts like gasoline, which it sells to consumers at its gas stations.
While TSO could be more profitable with higher oil prices, the company is expected to report earnings per share (EPS) of $5.50 this year and $6.05 next year. The stock is priced at about 15 times this year's expected earnings. Over the past five years, companies in the oil and gas operations industry have traded with an average price-to-earnings (P/E) ratio of 16.8. So, Tesoro could trade another 11% higher before it is in line with its historical peer average.