Sunoco Squeeze

Challenging marketplace, margin pressure hits retail marketing

By 
Steve Holtz, Editor in Chief, CSP Daily News

PHILADELPHIA -- A squeeze on retail gasoline margins cut Sunoco Inc.'s earnings in its retail marketing unit for first-quarter 2011 by almost two-thirds compared to one year ago.

"The marketplace continued to be challenging, with rising crude prices putting downward pressure on margins in both refining and retail marketing," said CEO Lynn Elsenhans during a earnings conference call Friday, "which was most apparent in our retail business, where the competitive environment made it difficult to quickly pass-through raw material cost."

Retail marketing earned $12 million [image-nocss] pretax in the quarter versus $34 million in first-quarter 2010, according to the company. The decrease in earnings was primarily due to lower average retail gasoline margins largely driven by the inability to fully pass-through wholesale price increases caused by the run up in crude prices.

"Rising prices also challenged profitability on the refining side, largely due to the pricing lag of our crude purchases," Elsenhans said.

The margin compression comes as Sunoco looks to grow its retail brand.

"We are working to grow the strong Sunoco brand that customers have come to know and trust. This entails improving year-over-year sales for fuel and convenience items," Elsenhans said. "By adding more locations and providing a great customer experience at retail, we expect our brand to pull volume through our invested network of refineries, logistics and service stations."

(Click here for previous CSP Daily News coverage.)

"We continue to make progress in executing our strategy," she said, including "the closing of the sales of Toledo refinery and continued expansion of our retail network, including the start of a long-term contract to operate retail locations along New Jersey's Garden State Parkway" (click here for previous coverage).

Companywide for the first quarter, Philadelphia-based Sunoco reported a net loss attributable to Sunoco shareholders of $101 million (a loss of 84 cents per share diluted) for first-quarter 2011 versus a net loss attributable to Sunoco shareholders of $63 million (a loss of 53 cents per share diluted) for first-quarter 2010.

"During the first quarter, we continued to make progress on growing our retail and logistics businesses and separating SunCoke Energy from Sunoco. We finished the quarter with approximately $1.5 billion in cash, which gives us strategic flexibility to further pursue our growth plans, Elsenhans said.

Refining & Supply had a pretax loss of $138 million in the current quarter versus a loss of $70 million in first-quarter 2010. The $68 million decrease in results was primarily due to lower realized margins and production volumes.

Retail Marketing earned $12 million pretax in the current quarter versus $34 million in first-quarter 2010. The decrease in earnings was primarily due to lower average retail gasoline margins largely driven by the inability to fully pass-through wholesale price increases caused by the run up in crude prices.

Sunoco is a leading transportation fuel provider, with operations located primarily in the East Coast and Midwest regions of the United States. It sells transportation fuels through more than 4,900 branded retail locations in 23 states. APlus convenience stores are operated by the company or independent dealers in more than 600 retail locations. The retail network in the Northeast is principally supplied by Sunoco-owned refineries with a combined crude oil processing capacity of 505,000 barrels per day. Sunoco is also the general partner and has a 31% interest in Sunoco Logistics Partners LP, a publicly traded master limited partnership that owns and operates 7,600 miles of refined product and crude oil pipelines and approximately 40 active product terminals.

Steve Holtz, CSP/Winsight By Steve Holtz, Editor in Chief, CSP Daily News
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