Sunoco Inc. (NYSE: SUN) is an American petroleum and petrochemical manufacturer headquartered in Philadelphia, Pennsylvania, United States, formerly known as Sun Company Inc. (1886–1920 and 1976–1998) and Sun Oil Co. (1920–1976).
Sunoco is one of the largest gasoline distribution companies in the United States, with Sunoco brand gasoline being sold in over 4,700 outlets;[2] just over a third of these outlets are Sunoco gas stations and convenience stores,[3] located in 26 states.[2]
Sunoco is a Fortune 100 Company. It is also the biggest company based in Philadelphia and the 2nd biggest in Pennsylvania behind AmerisourceBergen. Its headquarters are located in the BNY Mellon Center in Center City Philadelphia.[4]
In Canada, Sunoco was operated by Suncor Energy, a separate Canadian entity. In 2010, all Sunoco outlets were converted to Petro-Canada outlets.

Sunoco Inc. (NYSE:SUN) is the second largest independent refiner in the United States in terms of capacity and is capable of producing 910,000 barrels of refined crude product per day.[1] Its five refineries are located all over the U.S. and produce gasoline, jet fuel, heating oil, and diesel fuel. Through its logistics department, Sunoco transports its crude oil and refined products through a network of company-owned pipelines spanning approximately 6,000 miles.[2] While Sunoco distributes refined products all over the U.S., its sells its refined products primarily on the east coast.[3] Although the company's refining business is the largest segment in terms of revenue, 47% of Sunoco's 2008 earnings came from its non-refining business, which includes 4,700 retail stations, chemical manufacturing plants, and a series of coke manufacturing plants.[4]

Because Sunoco's revenues come from a variety of sources, the company's earnings were not as exposed to volatile oil prices in 2008.[5] Overall, the company earned $874 million in 2008, an increase of 7.5% from 2007.[6] In particular, the company reported record earnings for its retail segment and its logistic department, which operates the company's pipelines.[7] While oil prices remained low in the second half of 2008, Sunoco used its 2008 capital expenditures budget to increase their refineries' ability to process cheaper forms of crude oil.[8] The ability to refine heavy, sour crude oil has the potential of reducing the cost of producing refined petroleum products. However, the price differential between sour crude and more expensive sweet crude has less of an impact on a company's earnings when oil prices are low. [9]

Contents
1 Company Overview
1.1 Business Segments and Products
2 Trends and Forces
2.1 Sunoco plans to build attractive retail stores to draw in fuel consumers
2.2 Sunoco logistics seeks to expand through acquisitions
2.3 Increases in freight and shipping activity boost diesel demand and profits
2.4 Oil Downturn in 2Q 2009 Benefits Sunoco Logistics , but Detriments Principal Operations
2.5 Downturns for Gasoline, Chemical Consumption force Sunoco to take action to reduce costs and improve liquidity
2.6 Sunoco moves in renewable energy market with ethanol plant purchase
2.7 Sunoco Often has to Pay RecompenseI for Environmental Damages
2.7.1 The "Green Revolution" is a Threat to Sunoco's Ability to Sell its Products
3 Competitive Landscape
4 Notes
Company Overview

Tight refining margins in 2009 led Sunoco to focus on restructuring its operations and cutting costs rather than upgrading facilities and expanding production. The company took several steps to improve its liquidity position, including the modification of its incentive Distribution Rights program, the sale of partnership units in its Logistics business, and pension modifications designed to free up cash.[10] In early 2009, Sunoco sold the company's Tulsa refinery and Retail Home Heating Oil business, and has since reached an agreement to sell its polypropylene business at a loss. These changes led to cost savings exceeding $300 million on an annualized basis.[11] However, despite these sales, Sunoco reported a net loss attributable to shareholders of $329 million for the full-year 2009, compared to net income attributable to shareholders of $776 million in 2008.[12] Losses for the year stemmed from the refining business, which experienced historically low profit margins. Refining margins for 2009 averaged $3.66 per barrel, compared to an average of $8.60 in 2008.[13] With refining margins smaller than it the past, Sunoco reduced or stopped refining throughput on many of its refineries. Overall, throughput per day fell 12% in 2009 compared to 2008.[14]

Quarterly Analysis:


4Q 2010: For the final quarter of 2010, Sunoco reported net income of $87 million on Thursday compared with net income of $26 million for the comparable quarter in 2009.[15] Excluding special items related to aftertax gain from the liquidation of crude and refined inventories, income for the fourth quarter 2010 was $13 million.[16] Despite the positive rise in overall earnings, the refining segment reported a loss of $8 million for the fourth quarter versus a loss of $135 million loss in the fourth quarter 2009.[17] The refining segment benefited from rising margins compared to the prior year, but maintenance and lower volumes partially offset these gains. While many refiners reported positive earnings from March 2010 until January 2011, Sunoco's reliance on imported African and North Sea crude depressed refining margins.[18] These imported crude oils traded at a premium relative to domestic and Canadian crude available in other regions and have the potential of remaining at a premium in the first quarter. In addition, Sunoco's retail business posted profit of $3 million compared to $21 million in the fourth quarter of 2009. The logistics segment reported earnings of $23 million compared to $22 million in the fourth quarter of 2009.[19] For Sunoco's coke business, earnings for the fourth quarter of 2010 were $21 million, compared to $78 million in the final quarter of 2009.[20]


3Q 2010: While Sunoco's 2010 third quarter profit rose to $65 million compared to a loss of $312 million for the comparable quarter in 2009, refining margins did not improve by comparing sequential quarters.[21] According to Sunoco, refining margins fell by nearly half from the second quarter 2010 due to higher crude prices, ample supply, and weak demand.[22] The decline in refining margins compared to the previous quarter in 2010 illustrates the uncertainty surrounding gas and oil prices for the remainder of 2010.[23]

The company's refining and supply segment reported a loss of $70 million for the third quarter of 2010.[24] The company's utilization rates also have the potential of declining going into early 2011 due to refinery shut downs. Sunoco announced in the third quarter that it plans to temporarily shut down its 335,000 barrel/year Philadelphia refinery for maintenance in early 2011.[25]

2Q 2010: Higher refining margins, lower expenses, and improvements in its retail business all contributed to the $145 million second quarter 2010 profit reported by Sunoco.[26] For the comparable quarter in 2009, Sunoco reported a loss of $55 million.[27] Despite the closure of its 145,000 barrel-a-day Eagle Point refinery, Sunoco increased utilization at the remaining three refineries to their highest levels since 2007. To take advantage of higher margins, Sunoco produced a record amount of ultra low sulfur diesel across its refineries, and gasoline production in the northeast was 20% higher versus the second quarter of 2009.[28] Average retail gasoline margins also improved, which led to the year-over-year rise in profit at the company's retail segment. In the second quarter of 2010, the company announced plans to shift focus away from its core refining business to its retail and logistics business. Sunoco plans to eventually market more fuel than it produces through acquisitions beginning this year and early 2011.[29] However, crude marketing results declined in the second quarter 2010, and the logistics business reported profit 23% lower when compared to the second quarter 2009.[30]

1Q 2010: During the first quarter of 2010, Sunoco's reduction in costs was not enough to offset the losses experienced by lower margins and less output.[31] Sunoco reported a net loss attributable to shareholders of $63 million versus net income attributable to shareholders of $12 million for the first quarter of 2009.[32] In response to tighter margins, overall crude utilization rate fell from 85% in the fourth quarter of 2009 to 79% in the first quarter of 2010.[33] However, lower costs for purchased fuel and cost reduction due to business improvement helped offset these declines.[34] Overall, Sunoco's refinery business reported a net loss from continuing operations of $42 million in the first quarter of 2010 compared to net income of $14 million in the first quarter of 2009.[35] Sunoco's earnings contribution from its Retail Marketing, Logistics and Coke businesses totaled $75 million, up from $61 million in the first quarter of 2009. Higher realization and retail prices boosted income in all of these segments.[36] 4Q 2009: Refining and Supply had a loss from continuing operations of $135 million in the fourth quarter of 2009 versus income of $146 million in the fourth quarter of 2008.[37] While cost reduction partially offset further losses, low realization margins and production led to the loss in the final quarter. However, production volume did increase sequentially. Crude utilization rate climbed to 85%, compared to 74% in the previous quarter.[38] Also, the divestment of the Tulsa refinery in June contributed $36 million to fourth quarter earnings. Only two segments showed improvements compared to the same quarter in 2008: the Chemicals and Coke business. As a result of the absence of unfavorable tax costs, Chemicals had income of $6 million compared to a loss of $4 million in 2008.[39] The Coke segment earned $78 million in the fourth quarter of 2009 compared to $28 million in the fourth quarter of 2008.[40]


Historical Performance
2008 2009
Throughput (Thousand barrels daily) 791.3 696.2
Realized Wholesale Margin** (Per Barrel of Production Available for Sale) $8.60 $3.66
Net Income (Loss)
$243,000,000 $56,000,000
Refining and Supply: Income (Loss) from continuing operations $448,000,0000 $(316,000,000)
Source: Sunoco Investor's page[41]

Business Segments and Products
Refining and Supply (Loss of $316 million in 2009): Through the Refining and Supply segment, Sunoco manufactures petroleum products such as gasoline, jet fuel, diesel fuel, and heating oil. In addition, this segment produces olefins and other petroleum and lubricant products. Its largest products, in terms of sales, are gasoline and middle distillates.[42] As a result, the profitability of this segment depends heavily on the refining margins for gasoline and distillates, which are the income per barrel after the crude is purchased and processed into the specific fuel.[43] For 2009, realized wholesale margins averaged $3.66 per barrel, a 57% drop from margins in 2008. Crude oil throughput dropped approximately 11.5% as a result of lower sales and low margins.[44] However, utilization rates improved at the Philadelphia and Marcus Hook refineries in the fourth quarter of 2009 as margins showed signs of stabilizing.[45] Turnarounds at both the Marcus Hook and Toledo refineries is likely if margins improve in early 2010.[46] However, Sunoco's refining capacity is still much lower than it has been in 2008 and 2007 because many of the refineries were unprofitable in 2009. To cut costs, Sunoco idled its Eagle Point refinery in November 2009 and sold its Tulsa plant in June.[47]

Retail Marketing (Net Income of $86 million in 2009): Retail gas stations are primarily involved in the sale of products, such as gasoline and middle distillates (heating oil and diesel) as well as operating convenience stores in the gas stations. Sunoco has locations in 26 states, primarily located on the East Coast and in the Midwest region of the U.S. Income for this segment was $86 million, versus income of $201 million for 2008.[48] The decline in earning resulted from lower-than-average retail gasoline and distillate margins. For 2009, average gasoline and average distillate margins declined 41% and 13.6%, respectively, while daily sales volumes dropped 1% compared to levels during 2008.[49] The number of retail gasoline outlets owned by Sunoco at the end of 2009 was 4,711, which was approximately the same number owned at the end of 2008.[50]

Chemicals (Net Income of $1 million in 2009): The chemical segment comprises operations, such as production, distribution and marketing of petrochemicals, including phenol and polypropylene. Net income dropped substantially in 2009; Net income for full-year 2009 was $1 million compared to $36 million in 2008.[51] Sunoco's chemicals business is impacted by many of the same factors that effect its refining business. Like its refining operations, the earnings of its chemicals business fell in 2009 due to weak demand and rising feedstock costs.[52]

Logistics (Net Income of $97 million in 2009): Sunoco's Logistics segment operates pipelines and terminals that aid in the transportation of refined products and crude oil. The segment also engages in crude oil acquisition and marketing activities. At the end of 2008, Sunoco owned and operated approximately 3,800 miles of crude pipelines and 2,200 miles of refined product pipelines. The Logistics segment was one of two operations in which net income increased in 2009 relative to 2008. Net income was $97 million, compared to $85 million in 2008. Sunoco predicts that its logistic operations have the potential of improving in 2010 as well.[53] Out of a $840 million capital budget for 2010, $240 is expected to be devoted to growing Sunoco's Coke segment and Logistic segment.[54]

Coke (Net Income of $180 million in 2009): Sunoco's Coke segment operates metallurgical coke plants and metallurgical coal mines that produce metallurgical coke for use in the steel industry. Net income increased $75 million in 2009 compared to 2008.[55] $280 million of growth capital has been allocated to the Coke business for the construction of a new coke plant at Middletown, Ohio and some logistics operations.[56]

In January 2011, Sunoco acquired Harold Keene Coal for $40 million in cash. The acquisition is designed to boost Sunoco's coal reserves for its Coke business.[57] The coal reserves are estimated to be 16 million tons.[58] Sunoco has announced the plans to spin off its metallurgical coke operations in 2011, and this deal has the potential of making its operations more attractive to potential buyers.[59]

Trends and Forces

Sunoco plans to build attractive retail stores to draw in fuel consumers
A departure from its traditional business model, Sunoco plans to emphasize selling fuel, transporting it through pipelines, and blending fuel at terminals more than manufacturing fuel. With focal points of logistics terminals, pipelines, and retail sites, Sunoco announced in September 2010 that it plans to expand its retail operations to include bigger stores.[60]

Sunoco’s strategy shift is indicative of the company’s outlook regarding traditional oil refining in the northeast.[61] While the company plans to hold on to its refining assets, the company CEO does not believe that refining can generate the same returns as those from logistics or retail branded fuels operations.[62] Although Sunoco generated $86 million in refining profit in the second quarter of 2010, the company believes that refining margins are likely to be worse in the remaining quarters of 2010.[63] As of September 2010, Sunoco sells 80% of the fuel it produces through its branded network. The company plans to sell more fuel than it produces, but the time frame for that strategy was not disclosed.[64]

Sunoco logistics seeks to expand through acquisitions
In July 2010, Sunoco Logistics agreed to acquire a butane-blending business from Texon for $140 million plus $100 million in inventory.[65] The business blends butane in gasoline and will be incorporated into Sunoco's terminal blending business. Through acquisitions, Sunoco plans to expand its transportation fuel business, which includes pipelines, storage, and terminal assets, as the company diversifies away from oil refining.[66] Over the past several quarters, Sunoco's logistics business has performed well, especially relative to its lagging refining business.[67] While margins improves, the demand for biofuel blending and transportation also have the potential of increasing.[68]

Increases in freight and shipping activity boost diesel demand and profits
About 9.6% more freight was moved by trucks in April 2010 than in same period in 2009, which has led to an increase in the need for diesel fuel.[69] Demand for the fuel increased 12% for four weeks ended June 11, 2010 compared to the same period in 2009.[70] Prices have also improved: June 2010 prices are nearly double of their levels in June 2009. Due to a recovering economy, consumption of U.S. distillates are predicted to expand 1.4% this year, which is the largest annual increase since 2005.[71] As the largest refining on the East Coast, Sunoco has the potential of significantly benefiting from the rise in fuel demand and distillate prices. Sunoco, which lost $316 million on refining last year, is predicting that the a combination of lower costs, higher profits, and higher utilization rates will help its refining segment turn a profit in the third quarter of 2010.[72]

Oil Downturn in 2Q 2009 Benefits Sunoco Logistics , but Detriments Principal Operations
Lower refining profit margins for Sunoco's refined petro-products and chemicals led to a quarterly loss of $55 million in the second quarter of 2009.[73] Refining and supply operations had a loss from continuing operations totaling $77 million of which $6 million in losses came from the close of its Tulsa refinery.[74] While several of its operations were profitable in the second quarter, Sunoco focused on cutting the costs of its refining operations.[75] Through the sale of its Tulsa refinery and the purchase of a 100 million gallon-per-year ethanol facility in New York, Sunoco has the potential of relying less of the price and demand for refined petroleum products.[76]

Although its largest segments by revenue declined in the second quarter of 2009, revenue from Sunoco's logistics business increased18%.[77] Overall, revenue declined 61% from a drop in the prices of oil and the oil products it transports.[78] Sunoco Logistics increased from operations in the contango market. In a contango market, a futures contract for a commodity is more expensive than the present cost of the commodity. If the contango is large enough, an investor can buy a commodity, sell a futures contract on it and make money by just holding the commodity until it has to be delivered.[79] As a result, Sunoco, which owns 40% of Sunoco Logistics, has the potential of hedging losses from its oil operations.[80]

Downturns for Gasoline, Chemical Consumption force Sunoco to take action to reduce costs and improve liquidity
As a result of rising crude prices and relatively low demand for petroleum products, U.S. independent refiners have shifted focus from expansion to cost cutting. In November 2009, crude prices were double their 2009 lows, but demand for fuel has remained low for the year.[81] As a result, gasoline prices have not increased as quickly or by the same degree as crude, which has meant higher costs and smaller profit margins for most refiners. In an effort to reduce operating costs, many refiners, including Valero, Sunoco, and Western Refining, have temporarily stopped production at many of their refineries.[82] In addition to tighter refining margins, increases in both fuel efficiency and the number of viable energy alternatives have contributed to relatively low fuel consumption. [83]

From 1993 to January 2009, refining capacity rose 17%, but fuel demand has increased by significantly more.[84] To close the shortage, imports of petroleum-products has increased 93% over the same period.[85] U.S. refiners have the potential of upgrading their refineries to produce fuel inexpensively and efficiently in order to compete better with more overseas competition and smaller margins. Plant upgrades, smaller profits, and tighter credit markets margins are capable of forcing many smaller refineries out of business as size and scale become vital to reducing refining costs.[86]

For independent refiners, future profits depend heavily on rising demand for gasoline and diesel. Low levels of gasoline consumption have the potential of significantly impacting the balance sheets of U.S. refiners by forcing many refiners to shut down idle refineries and write down their value.[87] However, demand is not likely to reach 2007 peaks according to the Wall Street Journal. Factors the have the potential of curtailing gasoline demand include the long-term transition to more fuel-efficient vehicles, high unemployment rates, and growing concerns over environmental protection.[88] According to analysts at the brokerage firm Caris, refining margins are capable of remaining low through the second half of 2009.[89]


According to Zack's Investment Research, lack of geographic diversity and refining flexibility are two issues that, in addition to low refining margins, have the potential of playing a significant role in Sunoco's financial performance.[90] In response to these factors, Sunoco has taken several steps in 2009 and during the first quarter of 2010 in order to reduce costs.[91] In the third quarter of 2009, Sunoco shut down its New Jersey refinery in order to cut costs amid small profit margins.[92] Including the New Jersey shutdown, Sunoco reduced overall refinery utilization to 78% of capacity in 2009. Although refinery shutdowns eliminate potential losses from refining, they have the potential of burdening the operational refineries.[93] With less refineries operating, Sunoco has had to increase utilization rates at its larger refineries in order to prevent a shortage of fuel at its retail gasoline stations. Cutting costs has been the focal point of Sunoco's operations 2009 due to rising crude prices and shrinking refining margins.[94] Also, Sunoco sold its Tulsa refinery and Retail Home Heating Oil business in 2009.[95] The company announced in February 2010 that it reached an agreement to sell its polypropylene business.[96] In addition to refinery shutdowns and sales of businesses, the company also has cut its dividends by half to converse its cash balances.[97] Sunoco expects these strategic moves to save $300 annually in 2010.[98]

Sunoco moves in renewable energy market with ethanol plant purchase
In June 2009, Sunoco completed its purchase of a Northeast Biofuel plant for $8.5 million.[99] Through its purchase, Sunoco has acquired an ethanol plant with annual production capacity of 100 million gallons.[100] The plant has the largest production capacity in the northeastern United States, which is Sunoco primary market in terms of 2008 sales[101]. The purchase of this plant is Sunoco's "first step" into the alternative fuels market. The company has the potential of increasing its production capacity, through acquisitions or plant improvements, because the plant purchased from Northeast Biofuel is capable of supplying one quarter of Sunoco's ethanol needs.[102]

Ethanol plants have the potential of experiencing temporary shutdowns due to economic viability and profitability.[103] For example, Sunoco temporarily idled its Fulton ethanol plant at the end of 2009 as a result of unprofitable operations.[104] In January 2010, ICM Inc. announced its plans to retrofit this plant. Retrofitting involves redesigning inefficient plant in order to make them profitable again.[105]

Sunoco Often has to Pay RecompenseI for Environmental Damages
Oil refining can have a terrible effect on the environment, as chemicals used to turn oil into various types of fuel are released into the air and groundwater. When the environmental damages caused by Sunoco's operations occur to the extent that they break environmental protection laws, the company is often sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, Sunoco, Shell, ConocoPhillips, Chevron, Marathon Oil, BP, and Valero agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether, an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.


The "Green Revolution" is a Threat to Sunoco's Ability to Sell its Products
Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, people are becoming more and more disillusioned with petroleum. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. Internationally, the Kyoto Protocol has started a shift toward cleaner sources of energy, and though the U.S. isn't partaking Kyoto's changes, the recently passed Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[106], the Act could greatly reduce the growth of the petroleum refining industry - and environmentalists, who have deemed climate change to be "Our Generation’s Defining Moral Challenge", will continue to push for greater change.

Gasoline makes up more of Sunoco's production than any other petroleum product - 48.5% of the company's 906,000 barrels produced every day in 2007 were filled with the fuel[107]. Reduction in demand for gasoline caused by improving fuel economies and shifts towards cars with different power sources like ethanol and other biofuels would lower gasoline prices, crunch margins, and cut Sunoco's revenues.

Competitive Landscape

Companies in the oil and energy sector operate and compete with each other in different areas, such as chemicals, refining, oil exploration, etc. Sunoco faces direct competition from companies, such as Valero, Western Refining, Hess, Motiva Enterprises, Shell, Exxon Mobil, Chevron, and ConocoPhillips, etc.

To gain an advantage over its competitors in the industry, Sunoco has resorted to various measures. Some of these include entering new business segments (such as refining, retailing, chemicals and coke) and increasing the number of retail gas stations

At present, Sunoco’s refineries in the US are primarily involved in refining sweet crude. Although sweet crude is cheaper to process/refine, it is expensive as compared to sour crude, which is used by some of its competitors such as Valero. However, as a majority of the players do not have the capability to refine sour crude, it is not a major threat or challenge for Sunoco.

Further, unlike the larger players operating in this industry, such as Exxon, which finds new oil reserves (exploration), produces crude oil, refines it and then sells it through its retail gas stations, Sunoco is not involved in exploring and producing crude oil.

The table provided below compares the operational metrics for Sunoco vis-à-vis its competitors in 2008.

Refining Industry 2008 Metrics
SUNOCO CHEVRON VALERO EXXON MOBIL Royal Dutch Shell SINOPEC WESTERN REFINING ConocoPhillips BP LUKOIL(1) Eni S.p.A(1)[108] Total S.A.
Refinery Capacity
(Million BPD) 0.91[109] 2.139[110] 2.99[111] 6.2[112] 3.678[113] 3.376[114] 0.238[115] 1.986[116] 2.678[117] 1.135[118][119] 0.544 2.604[120]
Number of Refineries (including partial interests) 5[121] 18[110] 16[122] 37[112] 40[123] 17[124] 4[125] 12[116] 17[117] 9[126] N/A 25[120]
Number of Retail Gas Stations 7,785[127] 25,000[128][129] 5,800[122] 10,516[130] 45,000[131] 29,279[132] 153[133] 8,340[134] 22,600[135] 6,287[136] 6,441 (in Europe) 16,425[120]
(1) Latest data is for 2007
 
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