(Updates with comments from conference call and details.)
Naureen S. Malik and Matt Jarzemsky DOW JONES NEWSWIRES
Sunoco Inc. (SUN) swung to a second-quarter profit, beating analysts' views as higher refining margins and lower expenses offset lower production levels after shutting a major refinery late last year.
Shares were recently up 4.3%, at $5.75 in after-hours trading. The stock has rallied 37% so far this year.
Oil refiners have seen a robust recovery this quarter after posting a string of losses on reduced demand for gasoline and diesel during the recession. Though, with the pace of economic recovery expected to be slow, sustainability of the sector's rebound is uncertain. Cost-cutting initiatives have become the focus in the industry in an effort to generate profits and cash even in a tough environment. Sunoco had already seen some improvement in the prior period, as revenue jumped and the company posted a profit absent charges.
"As we get deeper into 2010, we expect market conditions for petroleum and chemical products to remain challenging, demand is weak, product inventories across the industry are high and margins are still pressured," Sunoco Chief Executive Lynn Elsenhans said in a conference call with analysts late Thursday. ""We are working hard to further lower our break-even cost per barrel so that we are profitable even in the worst of times."
The company is shifting focus from oil refining to the retail and logistics businesses, aspiring to market more fuel than it produces. Sunoco last month announced plans to break off its coal-producing SunCoke Energy unit early next year.
Whether it's petroleum-based fuel, biofuels or another liquid fuel, "there is good value to be created by being the supplier of choice for those fuels and having an iconic brand like the Sunoco diamond that is visible durable," Elsenhans said.
The vast majority of the company's earnings are driven by the core refining business, so when it comes to making acquisitions, Sunoco executives said they will be looking to expand the other businesses. "We are not looking to expand the refining business," Elsenhans said.
But after being a drag on earnings, gains seen in the refining segment helped the Philadelphia-based company post its first profitable quarter since the first quarter of 2009.
The second-largest independent refiner behind Valero Energy Corp. (VLO) posted a profit of $145 million, or $1.20 a share, compared with a prior-year loss of $55 million, or 47 cents a share. The latest quarter included 11 cents in restructuring and other charges. Revenue jumped 31% to $9.59 billion.
Analysts polled by Thomson Reuters most recently forecast earnings of 77 cents on $8.25 billion in revenue.
Sunoco's core refining and supply business swung to the black as higher margins and lower expenses were partially offset by lower volume stemming from the closure of the 145,000-barrel-a-day Eagle Point refinery in Westville, NJ, in late 2009. The remaining three refineries operated at their highest level since 2007, at 92% of capacity, up from 79% in the first quarter. Sunoco produced a record amount of ultra low sulfur diesel across its refineries to take advantage of improving margins, and gasoline production in the northeast was 20% higher versus the prior second quarter.
The retail business saw profit soar on higher average retail gasoline margins and lower costs. The company started up its first corn grain ethanol plant in Upstate New York this summer and is considering options to expand its small biofuel business further.
In the logistics business, which operates refined-products and crude-oil pipelines and conducts crude-oil acquisitions, profit dropped 23% as crude marketing results declined.
The coke segment's earnings slid 2.4% on a prior-year gain, but sales and volumes rose. Metallurgical coke is a component in steel. Executives reiterated plans to break off the unit in the first half of the 2011 but they haven't made a decision about how that will be accomplished.
Copyright © 2010 Dow Jones Newswires
