Oil refiner and marketer Sunoco Inc. (SUN) reported significantly better-than-expected first quarter 2010 results, driven by steady earnings from its non-refining businesses. Earnings per share, excluding special items, came in at 14 cents, defying the Zacks Consensus Estimate for a loss of 9 cents.
Year-Over-Year EPS Down
Compared to the corresponding quarter of last year, Sunoco’s earnings per share was down 72% (from 50 cents to 14 cents). The year-over-year negative comparison can be attributed to the challenging market environment that continued to adversely impact the company’s volumes and margins in its petroleum and the chemical businesses. However, revenue of $8.2 billion was up 37.6% from the first quarter 2009 level.
Refining & Supply
Excluding contributions from the discontinued Tulsa refining operations, the Refining & Supply segment lost $42 million during the quarter, as against a profit of $14 million in the year-earlier period, mainly on account of lower realized margins and production volumes, partly canceled by lower expenses.
Realized margin averaged $4.08 per barrel, down 35.6% from the first quarter of 2009, reflecting a weak refining margin environment. Total production was down approximately 14.3% year over year to 590.5 thousand barrels per day (MBbl/d), mainly due to planned turnaround activities in March at the Marcus Hook and Toledo refineries.
Retail Marketing
The Retail Marketing segment earned $21 million versus $6 million in the year-ago quarter, reflecting higher average retail gasoline margins and lower expenses, somewhat offset by lower distillate margins and lower gasoline and distillate sales volumes.

The Chemicals segment reported a profit (from continuing operations) of $3 million during the quarter compared to a loss of $12 million in the year-ago period. The year-over-year improvement reflects higher margins, higher sales volumes and lower expenses.
The Logistics segment earned $17 million, down from $30 million in the first quarter of 2009, adversely affected by lower results from crude marketing activities.

Sunoco’s Coke segment achieved $37 million in profits during the quarter, up from $25 million achieved in the previous year quarter. The higher income was on the back of improved results from Jewell cokemaking operations due to higher price realizations.
Capital Expenditure & Balance Sheet

Capital expenditure incurred by Sunoco during the quarter was $161 million (68% spent on the refining business and 17% on logistics). As of Mar 31, 2010, Sunoco had cash and cash equivalents of $812 million and long-term debt of approximately $2.3 billion. Debt-to-capitalization ratio stood at approximately 42.2%.
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 recently closed the previously announced sale of its polypropylene subsidiary Sunoco Chemicals Inc.
Other such steps include the closure of the previously-idled Eagle Point ( New Jersey ) refinery and cutting its dividend. Early last year, the company sold its Tulsa refinery and Retail Home Heating Oil business. We believe these liquidity enhancements (expected to save more than $300 annually) will help the company improve its financial health, while providing more flexibility to pursue its core business strategy.

While Sunoco’s diversification into other business lines makes the stock potentially more stable, the outlook for the company’s refining business remains challenging. Weak demand for refined products in the global downturn and increased capacity has squeezed margins throughout the industry. 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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