December 25, 2010 at 1:15 am #2423
Sunoco Dumps Refineries to Chase Pipeline Profits
By Noah Buhayar – Dec 23, 2010 3:02 PM CT
Lynn Elsenhans, chairman, chief executive and president of Sunoco, Inc. Source: Sunoco Inc. via Bloomberg
Sunoco Inc. Chief Executive Officer Lynn Elsenhans has figured out the best strategy for stanching losses from the refining business: get rid of refineries.
Elsenhans, 54, boosted Sunoco to the top of the list of major U.S. oil and gas companies in returns this year as the stock gained 53 percent. She took charge of the second-largest U.S. independent refiner in 2008, just as fuel demand slumped the most in 27 years, and immediately started trimming costs.
Sunoco, like almost all other U.S. independent refiners, lost money in 2009. Elsenhans reacted faster to the downturn than her rivals, shifting the company’s focus from the less- profitable refineries to more stable sources of revenue, such as pipelines and storage terminals. Other peers, including Valero Energy Corp., have followed in shutting down or selling plants.
Now analysts say she may have gone too far, after agreeing to sell or close three of the company’s five refineries. With the economy beginning to recover, Elsenhans, the only female CEO of a Fortune 500 energy company, faces the challenge of expanding profit at a business she has spent the last two years shrinking.
“When I look at the remaining business, there’s not much left,” said Philip Weiss, an analyst at Argus Research in New York who has a “sell” on the shares and owns none.
A 28-year veteran of Royal Dutch Shell Plc, Elsenhans froze pension benefits, fired employees and got rid of a corporate jet. She cut operating costs by 37 percent. After planned sales, Sunoco will have about half the 910,000 barrels a day of refining capacity it did in 2007, when the unit generated 82 percent of net income, according to data compiled by Bloomberg.
The company’s rising stock is a short-term benefit of a business strategy that carries long-term risks, said Weiss. Sunoco’s climb is better than rival refiners Valero and Tesoro Corp. It’s the top gainer this year among U.S. oil and gas companies in the NYSE Arca Oil Index.
The stripped-down company may not generate enough cash to meet future environmental regulations or cover damages if there were an accident at one of its refineries, he said.
Finding new sources of profit may be more difficult after Elsenhans completes all her planned asset sales, said Chi Chow, an analyst at Macquarie Capital USA Inc. in Denver, who has an “outperform” on the stock and owns none.
“This is a refining company that may not even own refineries at the end of the day,” Chow said.
The moves have heightened uncertainty about what Sunoco’s ultimate capital structure and asset profile will be, Mark Sadeghian, a Chicago-based analyst for Fitch Ratings, wrote in a Dec. 3 note.
Elsenhans declined to be interviewed for this story. Sunoco, based in Philadelphia, fell 15 cents to $39.86 at 4 p.m. in composite trading on the New York Stock Exchange. It has three buy recommendations, nine holds and four sells from analysts.
U.S. oil demand is in long-term decline, and less petroleum is needed to make gasoline as the federal government mandates greater use of ethanol and other biofuels, Elsenhans said at a Nov. 18 conference in Houston.
“In the last 20 years, there have only been five in which the refining industry in the United States has made a return that would warrant reinvesting,” she said.
A “smaller, more nimble” Sunoco will rely more on its gas stations, pipelines and terminals to make money, said Stephen Lehner, a managing director at Mount Kellett Capital Management LP, which owned 1.5 percent of Sunoco’s stock as of Sept. 30. Refineries may still be a key part of Sunoco, “but not necessarily the place where she can create the most value.”
Sunoco said yesterday it would buy 25 gas stations in New York State for an undisclosed amount, adding to its more than 4,800 retail locations.
The company put its pipeline and storage assets into a master-limited partnership, called Sunoco Logistics Partners, and first sold units in the business in 2002. It owns a 31 percent stake in Sunoco Logistics, according to regulatory filings. Sunoco’s “focal points” will be its pipelines and terminals, Elsenhans said in a Sept. 15 presentation to investors in New York.
By investing in pipelines and terminals, the company is betting that the variety of fuels will grow with new government mandates, spurring demand for the infrastructure to store and transport them, said Macquarie’s Chow.
Adding Butane, Ethane
The Sunoco partnership acquired a butane-blending business in July and petroleum products terminals in November. It also agreed in June on a project to bring liquid ethane from western Pennsylvania to Philadelphia, where it can be shipped to other markets, Elsenhans said in the Sept. 15 presentation.
Elsenhans, the daughter of an Exxon Mobil Corp. employee, has a long view on the industry’s past and its challenges.
In 1980 she joined Shell, where in the 1990s she ran one of its largest refineries in Deer Park, Texas. She “had to command the respect of people who thought they’d never be working for a woman,” said Jim Crownover, a former director at McKinsey & Co. who served with Elsenhans on the board of Rice University in Houston, where both received undergraduate degrees.
Elsenhans rose to executive vice president in charge of refining and chemicals worldwide for The Hague-based Shell, Europe’s largest oil company by market value. Her experience made her a strong candidate for the top position at Sunoco, where her focus from the start was on cutting costs, said Robert Darnall, who served on Sunoco’s board from 2000 until May 2010.
Leading the Way
Between 2007 and 2009, U.S. demand for petroleum products declined by 1.91 million barrels a day, the most since the two- year period ending 1981, according to Energy Department data. In late 2008, gasoline cost less on the New York Mercantile Exchange than oil, a signal that refiners’ margins for the fuel were negative.
To end losses, Sunoco was the first to say it would shut a U.S. refinery. A month later, Valero, the largest U.S. independent refiner, and Western Refining Inc. said they would do the same.
“She kind of got ahead of the curve of actions that competitors have taken ever since,” Darnall said.
The sales and cuts, which included eliminating about 750 jobs and getting rid of one of three corporate jets, have helped to more than triple Sunoco’s cash pile to $1.13 billion as of Sept. 30, from $327 million in 2008.
Elsenhans also has sold part of Sunoco’s chemicals unit, cut the company’s dividend and is seeking to spin off the most profitable remaining unit, SunCoke, which makes fuel for steelmakers.
Sunoco may reap as much as $2.6 billion from a spinoff, according to Macquarie’s Chow. Alternatively, Elsenhans may opt to distribute SunCoke shares among existing Sunoco stockholders, Weiss, the Argus analyst, said.
To contact the reporter on this story: Noah Buhayar in New York at firstname.lastname@example.org
December 25, 2010 at 1:16 am #5355
Here is good overview of the coming consequences of Sunoco’s CEO’s short term thinking and strategy which caused them to dump 3 of its 5 refineries and shift to more stable pipeline and terminal operations. Unfortunately it is one time bump that has a refinery company (who may not own any refineries at end day) locked into flat earning strategy as rest industry heads into up/growth cycle.
Sunoco like other independent refineries Valero, Tesoro & Western moved to sell assets and reduce operations in light of losing 2009 market. Previously all the independents had grown and improved earnings from picking up refineries that were sold as result of larger oil companies merging or consolidating & rationalizing old assets. Now they are headed in wrong direction and dumping, idling or shutting down assets that are more costly in the end than if they were doing right full cost operating analyst on plant operations.
You can easily chart what will be happening to Sunoco stock value and life expectancy of CEO Lynn Elsenhans – typically the exec’s in refining company that pull this move do so just before taking a new slot somewhere else to capture the short term bragging rights and dump the disaster on incoming replacement.
There are basically only 3 types of companies in Refining industry : Growers, Harvesters and Undertakers. Growers believe there is long term strategy and that company needs to grow to get there, the Harvesters believe that the best period has past and that the strategy is to reap as much earnings with remaining assets before exiting the business, and Undertakers believe the strategy is to exit as fast as the company can before the market becomes even worse. Really there are only two because a Harvester is just slow moving Undertaker.
Clearly Sunoco is unfortunately being steered by an Undertaker who thinks she is a Harvester – neither one good for the company or stock.
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