Sunoco Exits Refining, Begins ‘Strategic Review’ on Future
Sunoco Inc. (SUN), the Philadelphia-based company that has owned refineries for 117 years, said it will sell or shut its last two facilities and begin a “comprehensive” strategic review.
“Despite our best efforts, our refining and supply business has lost money in eight out of the last 10 quarters,” Lynn Elsenhans, chairman and chief executive officer of the company, said in a conference call with investors today. “It is in the best interests of the shareholders to exit the business and invest our capital resources in the retail and logistics businesses.”
All options are on the table, including a sale of the whole company, converting to a master-limited partnership, or buying pipelines, storage and retail fuel assets to expand those businesses, Elsenhans said.
East Coast refiners have struggled to turn a profit as the price of imported Brent oil tied to the U.K.’s North Sea production surged to $127.02 in April, according to Bloomberg data. High prices have crimped demand, causing the crack spread, a measure of the difference between the cost of Brent crude and the price at which refiners sell fuel, to drop 20 percent so far in 2011 from its 2007 average, according to Bloomberg data.
The decision to exit refining was based on the company view that the margin between fuel costs and oil prices in the Northeast is not likely to change, Elsenhans said on the call.
Sunoco’s wholesale refining margin in the second quarter fell 41 percent to $4.31 a barrel compared with the same period a year earlier, according to a company statement.
The challenging environment for East Coast refiners may make it difficult for Sunoco to sell its Philadelphia and Marcus Hook, Pennsylvania, plants, Mark Gilman, an analyst with Benchmark Co. LLC in New York, said in a telephone interview today.
The company may not get $1 billion for both refineries combined, excluding inventory, he said.
“I suspect a lot less,” Gilman said.
The most likely buyer of Sunoco’s refineries is private- equity-backed PBF Energy Partners LP, which has bought three U.S. refineries in the past year, Eliecer Palacios, an energy- sector specialist at New York-based investment bank Maxim Group LLC.
Selling or Idling
Selling the refineries as a package rather than individually may result in a lower price, Palacios said.
If the refineries can’t be sold, Sunoco will idle the main processing units in July, according to the company statement. Sunoco has hired Credit Suisse Securities (USA) LLC to handle the strategic review. The plants might be converted into storage terminals, Elsenhans said.
Cash flow would increase $200 million by shuttering the plants, Brian MacDonald, Sunoco’s chief financial officer, said during the investor call.
The plants represent 31 percent of the East Coast’s refining capacity, according to the U.S. Energy Information Administration. Closing both might lead to more imports of gasoline from Europe, said John Parry, principal analyst at IHS Herold Inc., a consulting firm in Norwich, Connecticut.
Taking the two refineries offline would not have a significant impact on gasoline prices because more refined fuel products may flow from the U.S. Gulf Coast to the East Coast on the Colonial pipeline system, he said.
Mitigating the Impact
The U.S. is not operating at its full refining capacity, and the recent addition of nearly 200,000 barrels a day at Marathon Petroleum Corp.’s Garyville, Louisiana, refinery should mitigate the impact of losing 505,000 barrels a day from Sunoco’s two plants, Parry said.
The company earlier this year spun off a stake in its SunCoke unit and agreed to sell the last of its chemicals business. It retains a logistics unit, which owns oil pipelines and storage terminals, and a retail marketing business that has 4,900 gasoline outlets, primarily in the eastern and midwestern U.S.
Sunoco, formerly known as the Sun Oil Co. of Ohio, bought its first refinery in 1894, according to its website. The two units now for sale can together process as much as 505,000 barrels of crude a day, according to today’s statement.
The company expects to have a pretax charge of as much as $2.2 billion in the third quarter related to its decision to exit refining. If the units aren’t sold, there may be additional charges of up to $500 million, Sunoco said.
The units have about $2 billion worth of crude oil and refined products in inventory at current prices, so the company would have a pretax gain if the refineries are sold or idled, according to the statement.
Sunoco rose 5.3 percent, or $1.92, to $38.03 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have dropped 8 percent this year.
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