Oil refiner and marketer Sunoco Inc. (SUN) has reported mixed third quarter 2011 results, with strong contributions from the logistics segment partially offset by weak production and margins.
The company has reported earnings per share (excluding special items) of 57 cents, missing the Zacks Consensus Estimate of 61 cents. However, comparing year over year, results improved 159.0% from the prior-year adjusted result of 22 cents.
Quarterly revenue came in at $12.16 billion compared with $9.22 billion in the prior-year quarter and was 40.2% above our projection.
Segmental Performance
Refining & Supply: The segment lost $17 million during the quarter. The loss was, however, narrower than a $70 million loss incurred in third quarter 2010, supported by higher realized margins and reduced costs.
Realized margin averaged $4.89 per barrel, up from $3.88 per barrel in the prior-year quarter, while total throughputs declined approximately 27.6% year over year to 495.2 thousand barrels per day (MBbl/d).
Retail Marketing: The segment earned $48 million versus $68 million in the year-ago quarter, reflecting steeper expenses partially and lower benefits from asset sales.
Logistics: The segment generated a profit of $53 million, up 32.5% year over year attributable to enhanced crude oil production and margins coupled with recent acquisition and organic growth projects.
Coke: The segment’s profit plunged 45.5% year over year to $20 million during the quarter due to lower coke sales revenue and greater maintenance expenses.
Discontinued Operations
In late October, Sunoco completed the divesture of its phenol manufacturing facility in Haverhill, Ohio to Haverhill Chemicals LLC, a unit of Goradia Capital LLC for $100 million in cash. In July, the company sealed the sale of its Frankford phenol and acetone plant to Honeywell International (HON). Both these transactions marked Sunoco’s exit from the Chemicals business, which from now on will be treated as discontinued operations.
The Chemicals segment generated an income (from continuing operations) of $1 million during the third quarter, as against a profit of $5 million in the prior-year period. The underperformance was due to lower margins and output.
Capital Expenditure & Balance Sheet
During the quarter, Sunoco incurred a capital expenditure of about $181 million. As of September 30, 2011, Sunoco had cash and cash equivalents of $1.66 billion and long-term debt (including current portion) of approximately $3.41 billion. Debt-to-capitalization ratio was 60.7%.
Our Recommendation
With a favorable view of Sunoco’s non-refining businesses, we believe the new-look Sunoco will offer more stable income, robust profitability and growth potential. The company offers a fairly stable source of earnings and cash flows from its growing asset base.
However, we remain concerned about Sunoco’s operational reliability issues and increased unscheduled downtime that could impact its refining system. Additionally, rising crude oil prices, lack of geographic diversification and stiff competition from peers such as Valero Energy Corp. (VLO) and Tesoro Corp. (TSO) have also built up our negative sentiment. Hence, we are maintaining our long-term Neutral recommendation on the stock.
Sunoco currently retains a Zacks #3 Rank (short-term Hold rating).
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