"These actions are consistent with our [image-nocss] objectives of creating shareholder value and improving financial flexibility while pursuing our long-term strategic initiatives," said Jim Mulva, chairman and CEO. "This plan capitalizes on our large resource base and our strong portfolio of projects, while providing flexibility for potential changes in business conditions. We will replace reserves and grow production from a reduced, but more strategic, asset base."
Capital expenditures in 2010 are expected to be approximately $11 billion, down from $12.5 billion in 2009. At this level of funding, the company will support exploration, production and reserve replacement, while preserving its project portfolio for future development. Further details of the company's 2010 capital program will be announced near the end of 2009, the company said.
The company intends to achieve its objective of replacing reserves through organic growth. Upstream production growth will occur from a reduced base, as a result of the asset rationalizations.
Proceeds from dispositions will be targeted to debt reduction, accelerating the company's return to its stated target debt-to-capital ratio of 20% to 25%. These actions will increase the Houston-based company's return on capital using normalized commodity price assumptions.
Separately, Philadelphia-based Sunoco Inc. announced that it is indefinitely idling all process units at its Eagle Point refinery located in Westville, N.J., in an effort to reduce losses in its refining business at a time when a recessionary economy, weak demand for refined products and increased global refining capacity have created margin pressure on the entire refining industry.
Sunoco will shift current Eagle Point production to its two nearby refineries in Marcus Hook and Philadelphia, which will now operate at higher capacity utilization. The company will be able to produce essentially the same amount of refined products in two facilities that it currently produces in three while continuing to meet customer demand, it said.
"We anticipated a downturn in the refining industry and took steps earlier this year to lower costs and enhance our competitive position; however, the operating environment continues to be very poor, requiring us to take further decisive action to effectively manage through the current downturn, while positioning Sunoco for profitable growth in future market conditions," said Lynn Elsenhans, Sunoco's chairman and CEO. "Idling Eagle Point, the asset least interconnected with our other operations, will enable us to significantly improve utilization rates at our two other local refineries and reduce our breakeven costs to more competitive levels."
The company intends to idle Eagle Point until market conditions improve and will evaluate this decision and other options on an ongoing basis, including the feasibility of using the facility to produce alternative fuels. Idling Eagle Point, the most recent addition to Sunoco's refining system, minimizes disruption to the rest of the company's operations. While Marcus Hook and Philadelphia serve as distribution hubs that feed refined products directly into Sunoco's branded retail network, Eagle Point is not as directly linked. Although the production units at Eagle Point will be idled, refined product storage and handling operations will continue. The products rack at Eagle Point owned by Sunoco Logistics Partners LP will remain open.
Approximately 400 employees will be furloughed during the idling of the facility. These employees will have the option to return to work in the event production resumes. During the furlough, the company will continue to pay its contribution to medical benefits for employees and dependents covered at the time of the idling for the duration of the furlough. In addition, the company will offer a voluntary severance program to affected employees, which includes job placement assistance and retraining.
The company expects to reduce its pretax expense base by approximately $250 million per year from the idling of Eagle Point. These savings are in addition to its previously announced target of $300 million in annualized Business Improvement Initiative savings by the end of 2009. The company is expected to incur pretax charges, the majority of which are noncash, of approximately $475 million to $550 million related primarily to asset impairment as well as idling costs. The majority of the charges will occur in third-quarter 2009 with some impact in fourth-quarter 2009 and first-quarter 2010. The company also expects to realize approximately $70 million in annualized cash savings as a result of reducing the dividend.
Elsenhans said, "We are making the tough decisions needed to deal with current market realities and position Sunoco for the future. Given weak industry dynamics, we are confident we are taking the right actions to improve our overall competitiveness, set the stage for investing in our strong regional brand, explore opportunities in biofuels and provide customers with a broader choice of transportation fuel options."
Sunoco is a leading manufacturer and marketer of petroleum and petrochemical products. With 825,000 barrels per day of refining capacity, approximately 4,700 retail sites selling gasoline and convenience items, approximately 6,000 miles of crude oil and refined product owned and operated pipelines and 43 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States.
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