Oil refiner and marketer Sunoco Inc. (SUN) reported weaker-than-expected third quarter results as its refining and chemicals operations slipped in the red, pulled down by reduced margins and production. Loss per share, excluding special items, came in at 29 cents, significantly wider than the Zacks Consensus Estimate of 9 cents. In the year-ago period, the Pennsylvania-based company earned $4.78 per share. Revenues were down 42.6% year over year to $8.7 billion.
Refining & Supply
The Refining & Supply segment lost $118 million during the quarter, as against a profit of $398 million in the year-earlier period, mainly on account of lower realized margins and lower production volumes, partly canceled by lower expenses. Realized margin averaged $2.72 per barrel, down 81.7% from the third quarter of 2008, reflecting a very weak East Coast refining margin environment. Total production was down approximately 17.2% year over year to 669.2 thousand barrels per day (MBbl/d), as market-driven rate reductions lowered volumes throughout the refining system.
Retail Marketing
The Retail Marketing segment earned $49 million versus $72 million in the year-ago quarter, reflecting lower average retail gasoline margins, somewhat offset by lower expenses.
The Chemicals segment reported a loss of $1 million during the quarter compared to a profit of $19 million in the year-ago period. The year-over-year decline reflects lower margins and sales volumes, partially offset by lower expenses.
The Logistics segment earned $19 million, down marginally from $20 million in the third quarter of 2008, as additional earnings from a refined products pipeline and terminal system acquired in November 2008 were offset by lower lease acquisition results.
Sunoco’s Coke segment achieved $35 million in profits during the quarter, up 20.7% from the previous year quarter. The higher income was on the back of increased price realizations from coke production.
Capital Expenditure & Balance Sheet
Capital expenditure incurred by Sunoco during the quarter was $286 million (42% spent on the refining business). Management expects capital expenditure to be just under $1 billion this year. At the end of the quarter, Sunoco had cash and cash equivalents of $178 million and long-term debt of approximately $2.1 billion. Debt-to-capitalization ratio stood at approximately 41.2%.
We believe that the overall environment for refining margins is likely to remain poor going into 2010. The sharply lower refinery utilization (just over 80% 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 have 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.
However, 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 last month that it would indefinitely idle a New Jersey refinery, furlough 400 workers and cut its dividend in half.
We currently rate Sunoco shares as Neutral. Unless the outlook for refiners improves, we expect the stock to perform in line with the market.
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