Oil refiner and marketer Sunoco Inc. (SUN) reported better-than-expected fourth quarter 2010 results, driven by improved sales, robust performance in its refining business and benefits from its restructuring initiatives.
Earnings per share (excluding special items) came in at 11 cents, above the Zacks Consensus Estimate of 7 cents and a significant turnaround from the year ago loss of 27 cents per share (adjusted). Quarterly revenue rose 17.7% year-over-year – from $8.7 billion to $10.2 billion – and was 14.3% above our projection.
Segmental Performance
Refining & Supply:The Refining & Supply segment lost $8 million (from continuing operations) during the quarter, as against a much wider loss of $135 million in the year-earlier period, mainly on account of higher realized margins and lower expenses, partly canceled by lower production volumes.
Realized margin averaged $4.77 per barrel, up considerably (by 143.4%) from the fourth quarter of 2009, reflecting a rebounding refining margin environment. As mentioned above, total production was down approximately 7.0% year over year to 633.9 thousand barrels per day (MBbl/d), mainly due to unplanned maintenance activities.
Retail Marketing: The Retail Marketing segment earned $3 million versus $21 million in the year-ago quarter, reflecting lower average retail gasoline and distillate margins, somewhat offset by higher sales volumes.
Chemicals:The Chemicals segment reported a profit (from continuing operations) of $4 million during the quarter, same as that in the year-ago period. The impact of higher sales volumes was made up for by higher expenses and lower margins.
Logistics:The Logistics segment earned $23 million, up slightly from $22 million in the fourth quarter of 2009, driven by higher lease acquisition results.
Coke:Sunoco’s Coke segment achieved $21 million in profits during the quarter, down from $78 million achieved in the previous year quarter. The lower income was on the back of weak results from Jewell cokemaking operations due to lower coal prices.
Capital Expenditure & Balance Sheet
Capital expenditure incurred by Sunoco during the quarter was $277 million. As of December 31, 2010, Sunoco had cash and cash equivalents of $1.5 billion and long-term debt (including current portion) of approximately $2.3 billion. Debt-to-capitalization ratio stood at 37.9%.
Strategic Initiatives
Sunoco has undertaken certain strategic actions to improve its performance and competitiveness in a cost-effective manner, as it struggles to cope with the bearish refining margin environment.
These actions include the closure of the previously-idled Eagle Point (New Jersey) refinery, the sale of the polypropylene business and cutting its dividend. Early last year, the company sold its Tulsa refinery and Retail Home Heating Oil business. We believe these moves will improve Sunoco’s near-term liquidity. The impending separation of its metallurgical coke manufacturing business – SunCoke Energy – also holds the promise of unlocking significant value.
Our Recommendation
Notwithstanding the strong results and the fact that market conditions are now much better than a year ago, Sunoco management admits that further challenges still remain. Recovery is expected to be slow in the U.S. and therefore the outlook for domestic refiners remains uncertain.
Though refining margins have rebounded from the year-end 2009 levels, they remain way off the levels achieved a few years ago. Taking into account above average product inventories (gasoline and distillate stocks), the imbalance between supply and demand is expected to remain in place for the next few quarters.
Sunoco shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
Sunoco competes in the ‘Oil Refining and Marketing’ industry with firms like Valero Energy Corp. (VLO), Tesoro Corp. (TSO) etc.
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