Independent refiner and marketer of petroleum products, Sunoco Inc. ( “>SUN ) reported a mixed third quarter 2010 results, reflecting impressive performance by Retail and Logistics business segments amid challenging market conditions. Earnings per share, excluding special items, came in at 22 cents, behind the Zacks Consensus Estimate of 42 cents. However, the reported quarter result was substantially ahead of the loss per share of 29 cents in third quarter 2009.
Including the net after-tax gain, earnings for the quarter came in at 54 cents per share as compared with the loss of $2.67 per share in the prior-year quarter.
Sunoco generated total revenue of $9.32 billion in the quarter, up 11.2% from third quarter 2009 and surpassed the Zacks Consensus Estimate of $9.05 billion.
Segment Performance
Refining & Supply: The Refining & Supply segment posted a loss of $44 million during the quarter, as against a loss of $118 million in the year-earlier quarter. The year-over-year improvement reflects higher realized margins and lower expenses, partially offset by unstable economic environment.
Realized margin averaged $3.88 per barrel, up 42.6% from third quarter 2009, reflecting a strong refining margin environment. Total production went up approximately 1.8% year over year to 681.5 thousand barrels per day (MBbl/d), mainly due to optimization of plants.
Retail Marketing: The Retail Marketing segment generated a profit of $41 million versus $49 million in the year-ago quarter, attributed to lower average retail gasoline and distillate margins, partially counterbalanced by reduced expenses.
Chemicals: The Chemicals segment reported a profit (from continuing operations) of $3 million during the quarter compared with a loss of $2 million in the year-ago quarter, accounting for higher sales volumes.
Logistics: The Logistics segment earned $26 million, up from $19 million in the third quarter of 2009, thanks to higher lease acquisition results along with additional earnings, attributable to acquisitions and organic growth projects.
Coke: Sunoco’s Coke segment profit dipped to $33 million from $35 million in the prior-year quarter, weighed down by less active Jewell coal and coke operations. However, better results from the other U.S. coke facilities partially mitigated the negative effects.
Capital Expenditure & Balance Sheet
Capital expenditure incurred by Sunoco during the quarter was $422 million (66.4% spent on the logistics business and 17.1% on coke).
As of September 30, 2010, Sunoco had cash and cash equivalents of $1.13 billion and long-term debt (including the current portion) of approximately $2.43 billion. Debt-to-capitalization ratio stood at approximately 40.0%.
Spin-off of SunCoke
Sunoco is moving ahead with its targeted plans of separating the metallurgical coke manufacturing business, SunCoke Energy, from the parent company within the first six months of 2011.
Our Recommendation
We believe Sunoco’s Retail and Logistics business units stand on a strong platform capable of ramping up the company’s performance in the coming months. We also remain particularly bullish on the coke business, which is poised to benefit from stable operations both on the domestic and international front, going forward.
However, considering the deteriorating macro backdrop, the low demand for petroleum and chemical products along with the company’s lack of geographical diversification, we are retaining our long-term Neutral recommendation on the stock.
Sunoco currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
SUNOCO INC (SUN): Free Stock Analysis Report
Zacks Investment Research
