Company News

Retail Rising for Sunoco as Refining Recedes

Selling refineries, reviewing businesses, pinning hopes on downstream opportunities

PHILADELPHIA -- During a conference call Tuesday to discuss the company's plan to sell its refineries and exit the refining business to focus on retail and logistics, Sunoco chairman and CEO Lynn L. Elsenhans said, "Despite our best efforts, our refining and supply businesses have lost money in eight out of the last 10 quarters and face significant capital outlays to satisfy environmental requirements and to ensure safe and reliable operations."

Elsenhans, who has indicated repeatedly that the company would be aggressively ramping up its downstream business, added, "We've been running our retail business in a certain way, with a certain organization. We've indicated to the marketplace that we believe there's more opportunities in convenience retailing, so that could, in order to really unlock that value, mean some organizational change in the way we manage the business."

Sunoco has added approximately 215 new sites to its retail network since the beginning of 2010, Joe McGinn, a spokesperson for Sunoco, told CSP Daily News following the company's acquisition of 14 Tom's gas stations from York, Pa.-based Shipley Group. The acquisition follows growth by Sunoco through recent acquisitions in New York and New Jersey, the announcement of Sunoco's return to the Ohio Turnpike and assumption of operations along the Garden State Parkway, as well as Sunoco's expansion into Alabama.

As reported in a Morgan Keegan/CSP Daily News Flash yesterday, a comprehensive strategic review to coincide with the sale of the Philadelphia and Marcus Hook, Pa., refineries, will look at how best to use the company's cash position and maximize potential for Sunoco's logistics and retail businesses. The company has not set a timetable for completing the review.

She said the "step-back fresh look" afforded the company by exiting refining provides clarity. "With SunCoke's recent initial public offering, our complete exit from the chemicals business, and our plan to exit refining, we have an opportunity to take a fresh look at all aspects of the company and gain added perspective on how best to use our cash and maximize the potential for our strong retail and logistics businesses.

Retail and logistics are "going to be the future of [the] company," she said.

Elsenhans said that no option is off the table for Sunoco. One strategy could include acquisitions in both retail and logistics. When asked about acquisitions, she said, "While we look at every aspect of the business, we have a strategy in retail and a strategy in logistics today. We continue to implement those strategies and a big part of those strategies include growth, and we would continue to implement that growth."

Credit Suisse Securities (USA) LLC has been retained to assist in the review process.

Sunoco said that it will pursue all options to sell its refineries, but if a suitable transaction cannot be implemented, the company intends to idle the main processing units at the facilities in July 2012.

"We have made progress in increasing the efficiency of our refineries over the last several years, but given the unacceptable financial performance of these assets, it is clear that it is in the best interests of shareholders to exit this business and focus on our profitable retail and logistics businesses which have higher returns, growth potential and provide steady, ratable cash flow," Elsenhans said.

Together with the separation of SunCoke Energy and the sale of the chemicals business, Sunoco's decision to exit refining marks a fundamental shift away from manufacturing that will re-position the company.

Sunoco's exit of the refining business after 117 years completes a gradual shift out of the sector, as it had reduced refining capacity 43% since 2009, according to a Wall Street Journal report.

"The movement out of the refining business is reflective of how difficult it is to be a refiner, trapped between declining consumer demand and rising crude prices," Sander Cohan, a principal at Energy Security Analysis Inc., told the newspaper.

Sunoco's departure comes as other energy companies have sought to shrink or shed their refining operations to focus on more profitable lines of business, the report added. So far this year, Marathon Oil Corp. has spun off its refining business, and ConocoPhillips announced plans to do the same by 2012. Murphy Oil Corp. last week sold its last U.S. refinery to Valero Energy Corp.

Sunoco had it harder than most refiners, according to analysts. Its refineries in Philadelphia and Marcus Hook lacked the capacity to convert cheaper, dirtier crudes into gasoline and diesel, and its troubles were compounded by repeated incidents that caused it to temporarily suspend refining operations, the Journal said. The company's East Coast presence meant it was unable to take advantage of the one bright spot in the industry that some competitors in the middle of the country were benefiting from: a cheap supply of crude bottled up in Cushing, Okla., which has helped lift the sector to profitability and delivered record margins to refiners closest to the glut, such as HollyFrontier Corp.

In connection with the decision to exit refining, the company said that it expects to record a pretax noncash charge of between $1.9 billion and $2.2 billion in the third quarter of 2011 related to impairment of the plant and equipment in the refineries. In the event the processing units are idled, additional pretax charges of up to $500 million, primarily related to contract terminations, staffing costs and severance, may be incurred. Most of these costs would be paid over a period of approximately one year.

Additionally, upon the sale of the refineries or idling of the main processing units, the company expects to record a pretax gain related to the liquidation of all of its crude oil and a significant portion of its refined product inventories totaling approximately $2 billion at current market prices. The actual amount of this pretax gain will depend upon the market value of crude and refined products and the volumes on hand at the time of liquidation.

Sunoco also announced that it has substantially completed the $500 million share repurchase program that was announced on August 9, 2011. The share repurchases were funded by the company's available cash reserves and resulted in the repurchase of 13,140,586 shares at an average price of $34.74 per share. As of September 6, 2011, the company has approximately 108 million shares of common stock outstanding.

Philadelphia-based Sunoco is a leading transportation fuel provider with operations located primarily in the East Coast and Midwest regions of the United States. The company sells transportation fuels through more than 4,900 branded retail locations in 24 states. APlus convenience stores are operated by the company or independent dealers in more than 600 of its 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 which owns and operates 7,600 miles of refined product and crude oil pipelines and approximately 40 active product terminals. Sunoco has an 81% ownership interest in SunCoke Energy Inc., which makes high-quality metallurgical-grade coke for major steel manufacturers.

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