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Oil refiner and marketer Sunoco Inc. has reported better-than-expected fourth quarter and full year 2011 results, with strong contributions from the logistics and retail marketing segments partially offset by weak production and steeper operating costs.

The company has reported earnings per share (excluding special items) of 5 cents, defying the Zacks Consensus Estimate of a loss of 27 cents. However, comparing year over year, results declined 54.5% from the prior-year adjusted result of 11 cents.

For full-year 2011, the company posted a loss of 3 cents per share, against earnings of $1.79 in the prior year. However, the reported results were better than our projection of a loss of 33 cents.

Quarterly revenue came in at $12.73 billion compared with $9.93 billion in the prior-year quarter and was 49.2% above our projection.

Sunoco generated revenues of $46.92 billion in fiscal 2011, compared with $36.40 billion in 2010. The fiscal result also surpassed the Zacks Consensus Estimate of $34.84 billion.

Segmental Performance

Refining & Supply:  The segment lost $117 million during the quarter, wider than a $17 million loss incurred in fourth quarter 2010, hurt by weak production and margins.

Realized margin averaged $1.13 per barrel, down from $4.77 per barrel in the prior-year quarter, while total throughputs declined approximately 28.5% year over year to 455.2 thousand barrels per day (MBbl/d).

Retail Marketing: The segment earned $40 million versus $1 million in the year-ago quarter, reflecting improved retail gasoline and distillate margins, partially negated by reduced gasoline sales volumes.

Logistics:  The segment generated a profit of $66 million, up 88.6% year over year attributable to enhanced crude oil production and margins, increased demand for oil coupled with recent acquisitions, and organic growth projects.

Coke:  In mid-January, Sunoco completed the separation of this segment into a 100% publicly traded company, named SunCoke Energy Inc (SXC - Snapshot Report).  Hence, from first quarter 2012, this segment will be treated as discontinued operation. 

The segment’s profit in the fourth quarter 2011 plunged 64.0% year over year to $9 million due to lower coke sales revenue and greater general and administrative expenses.

Discontinued Operations

In late October 2011, Sunoco completed the divesture of its phenol manufacturing facility in Haverhill, Ohio to Haverhill Chemicals LLC, a unit of Goradia Capital LLC for $100 million in cash. In July, the company sealed the sale of its Frankford phenol and acetone plant to Honeywell International (HON - Analyst Report). Both these transactions marked Sunoco’s exit from the Chemicals business, which from now on will be treated as discontinued operations.

The Chemicals segment generated an income (from continuing operations) of $3 million during the fourth quarter, as against a profit of $6 million in the prior-year period. The underperformance was due to lower margins and output.

Capital Expenditure & Balance Sheet

During 2011, Sunoco incurred a capital expenditure of about $723 million. As of December 31, 2011, Sunoco had cash and cash equivalents of $2.06 billion and long-term debt (including current portion) of approximately $3.44 billion. Debt-to-capitalization ratio was 65.6%.

Peer Comparison

Another independent refiner Tesoro Corporation (TSO - Analyst Report) came out with lower-than-expected fourth-quarter and full year 2011 results in early February. The company reported loss per share of 89 cents, wider than the Zacks Consensus estimated loss of 66 cents. For full-year 2011, the company earned $3.81 per share, missing our earnings projection of $4.13.

Our Recommendation

We like Sunoco’s plans to get rid of its East Coast-based downstream units that have been performing poorly during the last few years, thereby removing a major overhang from the stock. We also remain positive about the strong growth potential of Sunoco’s non-refining units, which diversify its portfolio and provide more stable revenue streams.

However, we remain concerned about Sunoco’s operational reliability issues and increased unscheduled downtime that could impact its refining system. Additionally, rising crude oil prices and lack of geographic diversification have also heightened our negative sentiment. Hence, we are maintaining our long-term Neutral recommendation on the stock.

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