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More Sludge in Sunoco's Tank

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Sunoco (NYSE: SUN  ) swooned in 2009's third quarter, and fourth-quarter results show that business for the independent refiner is still in the blackout phase.

Thanks to gains associated with refinery divestitures and shutdowns, the company reported fourth-quarter earnings per share of $0.22. But don't get too fired up. Excluding special items, the quarterly loss amounted to $0.27 -- a mere $0.02  sequential improvement. In the year-ago period, Sunoco had adjusted earnings of $2.68 per share.

Full-year results are no less noxious. In GAAP terms, the company lost $2.81 per share, which narrows to $0.32 when excluding special items. On both measures, the refiner was handsomely profitable in 2008.

The same story that's plagued fellow independents Valero (NYSE: VLO  ) and Tesoro hit Sunoco: weak demand coupled with excess supply, which has most recently been compounded by higher feedstock costs (think pricier oil). Result? Based on continuing operations, the company's Refining & Supply segment lost $135 million in the quarter and $316 million on the year.

But Sunoco is more than a refiner and supplier of gasoline. The retail business at its 4,700 stations and 700 convenience stores pulled in $21 million of earnings during Q4. Pipeline, storage, and marketing activities, in which the company participates through partnership with Sunoco Logistics Partners (NYSE: SXL  ) , chipped in about the same amount. However, given that Sunoco recently sold off part of its Logistics stake in order to bolster its own balance sheet, future takes may be lower.

Rounding out the good news, Sunoco's coking operations, which are wedded to the health of the steel industry, were profitable on both the quarter and the year. This segment likely has good long-term growth potential, although investors who want exposure to this key steelmaking ingredient may do better with purer plays, including the likes of Peabody Energy (NYSE: BTU  ) .

All told, nonrefining profits were dwarfed by losses in the main business, and it's hard to see that dynamic changing. For now, management is busy strengthening the balance sheet, having most recently exchanged its underperforming polypropylene chemical business for $350 million in cash.

Finally, it's worth noting that Sunoco followed Valero into the ethanol business in mid-2009 and has since described biofuels as a potential growth platform. In a drastic course correction, the Obama administration recently gave the nod to corn-based ethanol over the cellulosic variety. It will be interesting to see whether Sunoco goes with the tried-and-true method a la Archer-Daniels-Midland (NYSE: ADM  ) or eventually follows DuPont (NYSE: DD  ) and others into the fledgling world of cellulosic ethanol.

Ultimately, investors can easily replicate Sunoco's attractive prospects through individual holdings -- for instance, pipeline operator Magellan Midstream Partners or met-coal cowboy Alpha Natural Resources (NYSE: ANR  ) . As for the core refining business, operations are largely concentrated on the East Coast, which places the company smack up against some of the industry's strongest headwinds.

But maybe I've missed a compelling reason to get behind Sunoco shares. If so, sound off in the comments section below.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. Magellan Midstream Partners LP is a Motley Fool Income Investor pick. The Fool has a disclosure policy.

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