This Oil Stock's Ready to Reposition
A new trend is slowly gathering steam in the U.S. oil-refining sector. After larger rivals Marathon Oil (NYS: MRO) and ConocoPhillips (NYS: COP) decided to spin off their refining businesses, it's Sunoco's (NYS: SUN) turn to do the same -- almost.
Change in strategy
The Philadelphia-based refiner has announced plans to sell its refinery units in Philadelphia and Marcus Hook, Pennsylvania, which have a combined processing capacity of 505,000 barrels of oil per day.
Sunoco's decision to do away with both its remaining refineries should not come as a surprise. The move looked more or less apparent after Sunoco first announced the sale of its Tulsa refinery to HollyFrontier (NYS: HFC) . The Tulsa deal was subsequently closed in June 2009. Furthermore, in the fourth quarter of 2009, Sunoco shut down its Eagle Point refinery. The company said it is also selling its other money-losing units such as the Frankford facility and the Haverhill phenol chemical operations, in an earnest effort to reposition its business financially.
In the first six months of 2011, the refining and supply segment of Sunoco incurred a pre-tax loss of $182 million, mainly because of lower realized margins and lower production volume. The refinery segment has been hurt by lower production volumes for the last few years, exposing these units inefficiency. The writing down of the assets is another factor why losses aggravated. I feel the shift in focus from loss-making segments to profit making ones could be decisive—and profitable—for the company.
Apart from refining and supply, the company operates in four other segments, namely, retail marketing, logistics, chemicals, and coke. Other than the chemicals segment, the remaining three segments have been profitable for the last few years. Given that the company is planning to sell units of both the refining and chemicals segment -- which is at the core of the problem -- it's possible that it will succeed in transforming the future of the company as far as profitability is concerned.
The Foolish bottom line
There's little doubt that this stock looks promising in the long run. The next few years should prove how effective the repositioning strategies are for the company and in what manner this strategy will help the company to grow.
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At the time this article was published Fool contributor Abantika Chatterjee doesn't own shares of any company mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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