Oil refiner and marketer Sunoco Inc. (SUN) reported marginally weaker-than-expected fourth quarter results, as the challenging market environment continued to adversely impact the company’s volumes and margins in its petroleum and the chemical businesses.
Loss per share, excluding special items, came in at 27 cents, a penny wider than the Zacks Consensus Estimate of 26 cents. In the year-ago period, the Pennsylvania-based company earned $2.68 per share. However, revenue of $9.0 billion was up 3.8% from the fourth quarter 2008 level.
Estimate Revisions Trend
It was the company’s third negative earnings surprise in the past four quarters. Sunoco has performed poorly during this period with its average earnings surprise being a staggering -748.6%. This implies that the company has missed the Zacks Consensus Estimate by 748.6% over the last four quarters.
The negative trend was clearly visible in its estimates revisions. Though there were no estimate revisions in either direction over the last 7 days, earnings estimates for the company had been trending down over the past month, with the quarterly Zacks Consensus Estimate going down by 9 cents. Overall, 6 of 13 analysts covering the stock pulled back on fourth quarter projections during that time, while a single analyst raised estimates.
Refining & Supply
The Refining & Supply segment lost $135 million during the quarter, as against a profit of $146 million in the year-earlier period, mainly on account of lower realized margins and production volumes, partly canceled by lower expenses.
Realized margin averaged $1.96 per barrel, down 78.2% from the fourth quarter of 2008, reflecting a very weak refining margin environment. Total production was down approximately 14.6% year over year to 681.7 thousand barrels per day (MBbl/d), as market-driven rate reductions lowered volumes throughout the refining system.
Retail Marketing
The Retail Marketing segment earned $21 million versus $103 million in the year-ago quarter, reflecting lower average retail gasoline and distillate margins, somewhat offset by lower expenses.
Chemicals
The Chemicals segment reported a profit of $6 million during the quarter compared to a loss of $4 million in the year-ago period. The year-over-year improvement reflects lower expenses and the absence of an unfavorable inventory adjustment, partially offset by lower margins and sales volumes.
Logistics
The Logistics segment earned $22 million, down from $29 million in the fourth quarter of 2008, as lower lease crude marketing results were partly offset by additional earnings from refined product pipeline and terminal system operations.
Coke
Sunoco’s Coke segment achieved $78 million in profits during the quarter, up significantly (by 178.6%) from the previous year quarter. The higher income was on the back of recognition of an investment tax credit associated with the start up of the Granite City facility and dividend income from the Brazilian cokemaking operations.
Capital Expenditure & Balance Sheet
Capital expenditure incurred by Sunoco during the quarter was $206 million (26% spent on the refining business and 33% on logistics), bringing the full-year total to $950 million. For 2010, management expects capital expenditure to be around $840 million.
At the end of the quarter, Sunoco had cash and cash equivalents of $377 million and long-term debt of approximately $2.1 billion. Debt-to-capitalization ratio stood at approximately 39.8%.
Strategic Initiatives
Sunoco has undertaken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner, as it struggles to cope with the bearish refining margin environment. In this regard, Sunoco said that it would shut down the previously idled Eagle Point (New Jersey) refinery, signed a definitive agreement to sell the polypropylene business, and cut its dividend. Early last year, the company sold its Tulsa refinery and Retail Home Heating Oil business.
Sunoco announced a 50% reduction in its quarterly dividend to 15 cents per share (60 cents per share annualized). The new dividend is payable on Mar 10, to shareholders of record on Feb 17, 2010.
Bearish Outlook
Given that the overall environment for refining margins is likely to remain poor, we are bearish on oil refiners like Sunoco. The sharply lower refinery utilization (at just 77.7% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.
The recent rally in crude prices has added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being the second largest U.S. independent oil refiner by volume after Valero Energy Corp. (VLO), Sunoco remains particularly exposed to this unfavorable macro backdrop.
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