Sunoco Inc. plans to end nearly 120 years in the U.S. refining business, selling off its two remaining plants as higher crude prices and slumping demand squeezed profits in the latest restructuring of the sector.
The Philadelphia-based company will remain a gasoline retailer through its 4,900 stations across the East Coast and Midwest, but will put its 335,000 barrel-per-day (bpd) Philadelphia refinery and 178,000 bpd Marcus Hook, Pa., refinery on the block.
The move is the latest shift in the U.S. refining market, which has seen a wave of companies disposing of refining assets, selling off plants or mothballing them over the past two years as firms reorganize businesses to adjust to the changing economics in the oil products markets.
U.S. refiners have seen profits squeezed by sluggish demand due to the weaker economy and strong crude oil prices. Chief executive officer Lynn Elsenhans said the refining segment operated at a loss in eight of the last 10 quarters.
"It is in the best interests of shareholders to exit this business and focus on our profitable retail and logistics businesses," Ms. Elsenhans said in a statement on Tuesday.
If the company is unable to strike a deal to sell the plants by July, 2012, it plans to idle the two main processing units at the facilities.
One option for the company if no buyers can be found is to turn the refineries into terminals. The Marcus Hook site offers the better site for a terminal facility as it has storage tanks for crude oil and refined products as well as caverns for natural gas liquids storage, Ms. Elsenhans said.
The Philadelphia refinery site would likely be better used as an industrial site and could process ethane from Marcellus Shale natural gas into ethylene, suggested Ms. Elsenhans.
The 513,000 bpd of refining capacity Sunoco is selling represents a significant portion of total East Coast capacity. The U.S. Energy Information Administration estimated total East Coast refining capacity at 1.7 million bpd, of which 1.27 million bpd is operating capacity, in a report from early 2011.
In addition to its gasoline stations, Sunoco plans on retaining its logistics business, which has refined product and oil pipelines as well as terminals and is operated by Sunoco Logistics Partners.
The company will hold a strategic review, assisted by Credit Suisse, to explore ways to use its "strong cash position and maximize the potential for its logistics and retail businesses."
Sunoco purchased its first refinery in the 1890s as part of an early effort to diversify its oil production business.
Sunoco has already had some initial interest from potential buyers, a company spokesman said, but did not elaborate further, and industry watchers said big refining players on the East Coast such as PBF refining and ConocoPhillips could be barred from purchasing due to concerns about market concentration.
"It would have to be private equity," said Mark Gilman of New York-based The Benchmark Co., echoing comments from other analysts.
PBF, which purchased the two East Coast plants in recent years – including the idled Delaware City, Del., refinery and the Paulsboro, N.J., refinery –declined comment. ConocoPhillips also declined comment.
Norwegian integrated oil company Statoil, which is a supplier of crude to refiners in the region, also declined to comment.
Many U.S. refiners have struggled with the same profit problems that have hit Sunoco. While refiners in the Midwest are seeing margins improve due to growing supplies from U.S. and Canadian shale oil plays, East Coast and Gulf Coast refiners have struggled due to their reliance on higher-cost imports.
U.S. Northeast refining margins have averaged $8.59 (U.S.) per barrel so far this year, according to Credit Suisse in its weekly Refined Product report, $3.84 per barrel higher than a year ago, but nowhere near the $26.18 per barrel margin seen in the Midwestern U.S.
Sunoco's plants, which ran expensive light sweet crudes sourced from West Africa and other Atlantic Basin suppliers, also lack sophisticated coking capacity that would enable them to run cheaper heavy sour crude profitably.
"Sunoco has largely missed out on the strong recovery in refining profits over the last year because of its reliance on higher-cost waterborne feedstock and lack of mid-continent refining capacity," Morningstar Equity Research said in a note.
In addition, East Coast plants are further away from South American markets, which Gulf Coast refiners have been supplying in greater volumes as demand there grows.
Ms. Elsenhans said the strategic review will look at every aspect of the company and determine the best way to unlock value for shareholders, including governance, management, uses of cash and potential sales of other operating units.
"Everything is on the table," she said.
Sunoco expects a pretax non-cash charge of $1.9-billion to $2.2-billion in the third quarter related to impairment of the plant and equipment in its refineries.
If the processing units are idled, additional pretax charges of up to $500-million may be incurred.
Sunoco has already completed the sale of its 170,000 bpd Toledo refinery in Ohio to PBF Holding for $400-million. In May, it sold a chemicals plant in Philadelphia to Honeywell International for about $85-million.
Sunoco also spun off its coal production unit SunCoke Energy and investors welcomed the debut of the producer of steel-making coke's shares.