Sunoco's (NYSE: SUN) third-quarter results demonstrate that fear and loathing continue to dominate the independent refining industry. Market fundamentals remain weak, and industry executives, at least in Sunoco's case, are busily exercising their distaste for anything that weighs on cash flow -- whether that's an underperforming facility or employee benefits.
On a reported basis, Sunoco turned in a net loss of $312 million, or $2.67 per share. That compares to earnings per share of $4.70 in the year-ago period. Excluding special items, which include a $254 million non-cash asset-impairment charge, the loss narrows to $0.29 per share. Unfortunately, that's a shade worse than the prior quarter's results.
It's no surprise, then, to learn that realized refining margins moved lower sequentially, as crude differentials weakened and product pricing failed to strengthen. The chemicals business, in which Sunoco competes with industry giant Dow Chemical (NYSE: DOW), also saw lower margins and sales volumes.
Like competitor Valero's (NYSE: VLO) recent results, Sunoco's numbers contained pockets of upside. Its non-refining businesses -- which contributed just more than 50% of 2008 net income -- posted a profit of $102 million, up smartly from the $78 million earned in the previous quarter. Although they're arguably no less economically sensitive than refining, the company's metallurgical coke operations showed surprising strength. Longer-term investors should keep on eye on the company's relationships with U.S. Steel (NYSE: X), Arcelor Mittal (NYSE: MT), and AK Steel (NYSE: AKS), since Sunoco's plans to increase coke production could be a substantial boon to companywide performance.
At this point, investors are no doubt familiar with management's decision to shutter the Eagle Point refinery and shift production to nearby plants. Updating conference-call listeners, management reported that all Eagle Point production had ceased and that the facility should be in "full mothball mode" by year-end, which would represent the beginning of a related $250 million in annual pretax savings.
In addition, management is on schedule to deliver $300 million in annualized savings as part of a previously announced initiative. Finally, the company's taken the axe to employee pension and post-retirement medical plans. Collectively, these programs should help boost profitability, but they're no stand-ins for a strong economy.
Personally, I'll be keeping an eye on Sunoco's cash flow. The company was in the black on an operating basis, but capital expenditures pushed free cash flow deeply into the red during the quarter.
Looking ahead, management doesn’t see much market improvement into 2010, a view not unlike Frontier Oil's (NYSE: FTO) recent outlook.
In terms of earnings, investors should be prepared for continued losses or razor-thin profitability. As far as the stock is concerned, who knows when the market will decide to bid up shares on the hope of an eventual economic recovery? So if you have the stomach for high-octane volatility, the recent selloff could represent a decent entry point.
Related Foolishness:
Like this article? Get our best articles delivered direct to your inbox at no cost. Sign up for Foolwatch Weekly by entering your email below.
Terms & Conditions
RSS Headlines
Fool UK