Sunoco (SUN)

• Article
• Discussion
• Edit
• History
• Bookmark

See all Bulls Reasons Bulls: Reasons To Buy Strong margins and brand visibility 0% agree Strong margins and brand visibility Sunoco uses pipelines to transport crude oil from oil wells to its refineries as well as to transport refined products to its retail gas stations. This enables the company to manage its margins and also improve the visibility of its brand. View or Edit Reason 0 votes 0% agree Well diversified into 5 segments 0% agree Well diversified into 5 segments Sunoco has diversified its business into 5 inter-related segments because of which the earnings and revenues of the company tend to be stable. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Uses costly sweet crude 0% agree Uses costly sweet crude Sunoco uses sweet crude, which is a costly raw material as compared to sour crude. Thus, it has a higher cost of production as compared to some its competitors such as Valero. View or Edit Reason 0 votes 0% agree Prone to risk of natural disasters 0% agree Prone to risk of natural disasters As with other companies operating in this sector, Sunoco is prone to the risk of natural calamities such as hurricanes, which have the potential to damage its refineries and disrupt production. View or Edit Reason 0 votes 0% agree Faces litigation over environmental pollution 0% agree Faces litigation over environmental pollution Sunoco faced some litigation for causing environmental pollution due to the use of MBTE in the U.S. As a result, retaining investor confidence will be a challenge for the company. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion All of this info does not tell me where your retail stations are??, I was interested in a card to... more [Dismiss] [Done] See All Suggestions

Top Contributors Diwaker Avinash Gandhi Mayank Related Articles SINOPEC Shangai Petrochemical Company (SHI) Valero Energy (VLO) Royal Dutch Shell (RDS'A) Renewable Energy Barrels per Day (bbl/d or bpd)

Sunoco Inc. (NYSE:SUN) is the second largest petroleum refining and supply company in the U.S. At present, the company has a refining capacity of approximately 1.3 million barrels per day, with operations spread across the Northeast and Mid-West. The refining business primarily includes refining of crude oil to produce products, such as gasoline, diesel, jet fuel, etc.

As petroleum is the primary source of energy for transportation, industrial, electric utility and residential/commercial sectors, the demand for petroleum has experienced sustained growth over a period of time. The demand for petroleum grew by 2 percent in 2004-05 to reach approximately 30 million barrels per day in 2005.

Sunoco uses sweet crude (high quality crude oil with low-sulphur contents), which cheaper to refine as compared to sour crude (low quality crude oil with high-sulphur contents) but is more expensive to acquire as compared to the sour crude, which reduces the margins for the company. For example, the cost of heavy sour crude used by Valero is approximately USD 15 per barrel less than the light sweet crude used by Sunoco.

Sunoco owns retail gas stations which are either operated by Sunoco itself (directly owned gas station outlets) or by independent distributors (licensees). However, the company has now started to restructure its retail marketing segment during the last few years by reducing the number of directly owned gas stations and increasing the number of licensees instead. As the cost incurred by the company to run a licensees outlet is less than the cost of operating a directly owned gas station, this strategy adopted by the company lead to an increase in margins. This also protects the company from some legal hassles involved with operating directly owned gas station outlets.

The industry has become more profitable due to the critical shortage of refining capacity in the U.S, which leads to an increase in price. Refiners like Sunoco, however, see damages to profit margins when crude prices rise, as crude oils are inputs for Sunoco, meaning that costs rise when crude prices rise.

The oil companies, such as Sunoco are susceptible to economic downturns as the demand for petroleum products is highly dependent on overall economic growth.

Damage caused to the refineries by natural disasters (such as hurricanes Katrina and Rita) is an additional issue the company needs to confront from time to time. For example, refineries producing 367,000 barrels per day were shut down in the Gulf of Mexico due to the damage caused by Hurricane Rita. Similarly, Hurricane Katrina resulted in the closure of 20 percent of the country’s refining capacity in a single day.

[edit] Company Description

Sunoco is the second largest refining and supply company in the U.S.; in the fourth quarter of 2007, the company produced 962,000 barrels of refined petroleum each day^[1]. In 2007, the company posted revenues up about 15.5% from 2006, at $44.728 billion. Net income fell 9%, however, to $891 million. Margins peaked in the second quarter, and then fel for the rest of the year, as oil prices continued to rise, raising input costs. Rising oil prices hurt Sunoco's refining margins, as well as its petrochemical processing, petroleum coking, and gasoline retail margins. Only the company's logistics segment, which provides pipeline and terminal services, saw income grow^[2].

Sunoco used to be involved in exploration and production of oil. However, in 1998, the company restructured its operations to increase its focus on the refining and marketing business.

During the last few years, Sunoco has acquired a number of other companies to grow its current operations, such as the acquisition of Aristech Chemical Corporation and Eagle Point Refinery in 2001 and 2004, respectively, which allowed Sunoco to double the size of its chemical business and increase its refining capacity by 20 percent. The company is constantly upgrading its refining equipment, making its daily production capacity variable throughout the year.

[edit] Business Drivers

Comparable refining capacity (volume in terms of barrels per day – BPD), expansion of distribution network, and presence across different geographies and business segments are the main drivers of revenue in the oil and energy sector.

The table provided below tracks the historical performance of Sunoco.

Source: Company Data

Although Sunoco is not in the oil exploration and production business, it is present in all stages of the supply chain from refining crude oil to selling petroleum products through its own retail gas stations. In addition to this, the company uses by-products of the refining process to produce chemicals and coke. The chemicals and coke business provides Sunoco with a stable flow of income/revenue as the demand for these products does not reduce even if the demand for other petroleum products declines.

Sunoco has a large distribution network in the form of pipelines for transporting refined products, such as gasoline, lubricants, and crude oil. This network of pipelines reduces the cost of transporting these products for the company. Further, the company also has approximately 4,800 retail gas stations and distributor outlets spread across the Northeast, the Midwest and the South Central. These widespread retail outlets enable effective distribution of gasoline and related products. The presence of such a large number of retail gas stations also enables the company to establish its presence among its end consumers.

Sunoco owns real estate assets (in the form of retail gas stations) and as part of its recent strategy, Sunoco is restructuring its existing network of retail gas stations. Sunoco is trying to improve the portfolio of real estate owned by it (in the form of retail gas stations) by selling retail gas stations, which generate low revenue and establishing gas stations in locations, where sales will be higher (called as the Retail Portfolio Management - RPM, strategy by Sunoco).

The company faces the risk posed by natural disasters. Hurricanes such as Katrina and Rita can destroy its infrastructure. Historically, 3Q margins are lower than 2Q margins because hurricane season falls in the third quarter, cutting margins down yearly. Hence, the company is required to make provisions to protect its infrastructure from such calamities.

Environmental hazards are another area of concern. Environmental hazards include the use of the chemical methyl tert-butyl ether (MTBE), which contaminates groundwater and causes environmental pollution; the company has faced some litigations for the use of this chemical.

[edit] Business Segments and Products

Sunoco’s operations can be divided into five segments – refining, retail gas stations, chemical, logistics and coke. Refining contributes the largest share of revenue to the company (49 percent of the total revenue during 2005), followed by retail gas stations (35 percent), logistics (8 percent), chemicals (7 percent) and coke (1 percent). The product portfolio of Sunoco is marketed under two brands – Ultra 94 and Sunoco.

The refining segment comprises production of refined products (gasoline, diesel, lubricants, etc). No new refineries have been set up in the U.S. since 1976. This is primarily due to the high cost and strict environmental restrictions on setting up refineries. Even the cost of expanding the capacity of existing refineries is high. Refineries have increased production primarily by making technological upgrades to their existing refineries and by acquiring other older refineries, which has limited the supply and led to an increase in price.

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. The chemical segment comprises operations, such as production, distribution and marketing of petrochemicals, including phenol and polypropylene. The logistic segment involves the transportation of crude oil from oil wells to refineries and of gasoline and other products from refineries to retail gas stations through pipelines. The coke segment produces petroleum coke.

[edit] Customer Demand

As with other companies operating in this sector, Sunoco is vulnerable to a decline in the demand for energy and other related products as a result of an economic downturn in the country; the demand for energy is closely linked to overall economic growth of a country.

The demand for heating oil such as diesel fuel is increasing among the residential customers. However, the demand for heating oil changes with the change in season. For example, demand is higher during winters as compared to the demand during summers. On the other hand, the supply of heating oil is affected by increase or decrease in the inventory levels of the company, political uncertainties, and limited production capacity. The price of heating oil fluctuates as a result of this dynamic demand and supply situation, which poses a challenge for the company.

Sunoco’s coke segment sells most of its output to a single customer on a long-term contract, which exposes the company to the risk of fall in earnings if that customer does not honor that contract.

[edit] Sunoco Often has to Pay Recompense 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.

[edit] 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^[3], 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^[4]. 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.

[edit] 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 2007.

[edit] Notes

1. ↑ http://seekingalpha.com/article/63699-sunoco-inc-q4-2007-earnings-call-transcript?source=d_email&page=3
2. ↑ http://phx.corporate-ir.net/phoenix.zhtml?c=99437&p=irol-newsArticle&ID=1105320&highlight=
3. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007, http://www.whitehouse.gov/news/releases/2007/12/20071219-1.html
4. ↑ http://phx.corporate-ir.net/phoenix.zhtml?c=99437&p=irol-newsArticle&ID=1105320&highlight=
5. ↑ SUN 2007 10-K
6. ↑ CVX 2007 10-K
7. ↑ VLO 2007 10-K
8. ↑ XOM 2007 10-K
9. ↑ RDS 2007 20-F
10. ↑ SHI 2006 Fact Sheet
11. ↑ WNR 2007 10-K
12. ↑ COP 2007 10-K
13. ↑ BP 2007 20-F
14. ↑ LUKOIL Company: General Information
15. ↑ E 2007 Annual Report
16. ↑ Total Website: "From Crude Oil to the Consumer"
17. ↑ Conversion factor is 1 BPD = 50 tonnes per year
18. ↑ Obtained by Dividing Total Throughput of 2.413 MMBPD by utilization rate of 89%
19. ↑ Sinopec Refining Overview