UPDATE:Sunoco First To Close Major US Refinery In Downturn
October 06 2009 - 7:06PM
Dow Jones News
Sunoco Inc. (SUN) on Tuesday became the first major oil refiner
to announce the shutdown of a big U.S. refinery during the sector's
most recent downturn - and it isn't expected to be the last.
Sunoco, the second-largest U.S. independent oil refiner by
volume after Valero Energy Corp. (VLO), also cut its dividend in
half. Both actions, taken because "the operating environment
continues to be very poor," are expected to save the big oil
refiner a total of $320 million a year.
The move to mothball the Eagle Point refinery in Westville, N.J.
comes months after speculation that some East Coast refineries
would have to shut down, as the region's facilities suffer from
poor refining margins and strong competition from Europe. The U.S.
refining sector as a whole has been struggling as fuel demand wanes
while the federal government tightens regulation of the industry.
Last month, Valero drastically cut back operations in its Delaware
refinery, and extended the shutdown of its Aruba refinery for an
undetermined period.
"Sunoco, like every other refiner, is facing serious
challenges," Lynn Elsenhans, the company's chief executive, said in
a evening conference call with analysts. "The near-term outlook
remains challenging."
Mark Flannery, an analyst with Credit Suisse, said the closure
is a step toward improving the financial health of the company and
the whole sector.
"Only the permanent removal of surplus capacity from the U.S is
likely to restore refining margins to health," Flannery wrote in a
note to clients.
The economic downturn is expected to result in the closure of up
to 10% of the U.S. refining capacity.
During the recession Sunoco has been cutting costs and is trying
to sell its chemicals operations.
About 400 workers will be furloughed while the Eagle Point
refinery is closed, but they may return to work should the company
decide to reopen the plant. Sunoco will continue to pay its
contribution to medical benefits as well as offer job placement
assistance and retraining.
Closing the plant will boost utilization at two nearby
refineries, saving the company about $250 million a year.
The Eagle Point facility was significantly less competitive than
Sunoco's two other plants - in Philadelphia, Pa. and Marcus Hook,
Pa. - which are connected via pipelines to each other, said Neal
Earnest, an industry consultant and vice president of Muse Stancil
in Dallas.
"It was a aged facility. It likely needed some significant
capital," Earnest said.
Valero said that it is still considering closing its Delaware
City, Del. refinery despite the fact that Sunoco's move could ease
the refining market tension on the East Coast.
Valero spokesman Bill Day said the San Antonio-based company has
been expecting other refiners to begin closing or shedding
units.
"I wouldn't be surprised to see more of this type of action take
place," Day said.
Sunoco's quarterly dividend will be lowered to 15 cents starting
in the first quarter to preserve capital, add flexibility and bring
Sunoco's yield more in line with its peers. The cut is expected to
save the company $70.1 million a year.
Sunoco said the plant closure wouldn't affect its ability to
meet consumer demand and it may reopen the plant if the market
improves. The company also said it would consider using the idled
plant to produce alternative fuels.
In the second quarter, Sunoco swung to a loss as higher prices
for crude oil and weak demand ate into margins and revenue.
Sunoco's shares fell 2.8% to $27.10 in after-hours trading. The
stock has lost more than a third of its value this year but is flat
with a year ago.
-By Susan Daker and Kathy Shwiff, Dow Jones Newswires;
713-547-9208; susan.daker@dowjones.com