We are maintaining our Buy recommendation, but lowering our estimates and price objective for San Antonio-based Tesoro Corporation (TSO) -- an independent refiner and marketer of refined petroleum products in the western U.S. -- to reflect the still-challenging refining margin environment.

Our new 2009 EPS estimate is $1.27, down from $2.30 before, while our 2008 estimate remains unchanged. Despite the near-term challenges, our long-term view of the business remains favorable as we believe that the company is in a good position with a strong balance sheet, and has the ability to fund capex (capital expenditures) with operating cash flows.

On October 29, Tesoro reported robust third-quarter 2008 recurring earnings of $1.63 per diluted share, compared to $0.40 per diluted share in the year-earlier quarter. The quarterly results were an improvement over the last few quarters, as refining margins improved on the back of a sharp pullback in oil prices.

Despite some recent gains, shares of Independent refiners still remain fairly weak due to refining margin weakness. Despite these relatively weak fundamentals, our long-term macro outlook remains favorable, particularly for the West Coast market.

Tesoro's strong leverage to this key market, which got a further boost from last year's Shell refinery acquisition, is particularly valuable. Valuation has become particularly compelling following the recent sell-off, which offers significant upside from current levels. Our new $25 price objective, reduced from $30 before, which we determine using a 2009 P/E multiple of 16.4x.