Sunoco to Offload Toledo Refinery - Analyst Blog

Leading transportation fuel provider Sunoco Inc. (SUN) entered into a definite agreement with Toledo Refining Company LLC for the sale of an oil refinery in Toledo, Ohio. Toledo Refining is an affiliate of PBF Holding Company LLC and will pay approximately $400 million for the deal.

Under the terms of the agreement, Toledo Refining will also acquire the crude oil and refined product inventory attached to the refinery, valued at market prices on the closing day. Despite the sale of the refinery, Sunoco has reached a long-term covenant with PBF to continue supplying refined products to its branded distributors.

Out of the total value for the asset, Sunoco will receive $200 million in cash and the remaining as a $200 million two-year note. The company also has the option to receive a payment of up to $125 million depending on the performance and future profitability of the refinery.

The Toledo refinery has a production capacity of about 170,000 barrel-per-day and contributed approximately $29 million toward Sunoco's earnings in the first three quarters of 2010. Following the divesture of this refinery, Sunoco will be left with two refineries in its possession.

The deal, subject to regulatory approval and customary closing conditions, is expected to be sealed in the first quarter of 2011.

Sunoco expects to record pre-tax charges of approximately $500 to $550 million related to the sale, primarily in the fourth quarter of 2010. In addition, the company also expects the sale of the crude oil and refined product inventory to be accretive as a pre-tax gain of approximately $450 to $500 million in the first quarter of 2011. Sunoco estimates pre-tax cash proceeds from the sale of the inventory at approximately $200 million.

Sunoco also informed that the SunCoke Energy spin-off, scheduled for the first six months of 2011, might be extended due to the pending litigation with ArcelorMittal (MT) regarding coke pricing. The trail concerning the two companies is slated in May 2011.

We support Sunoco's decision to sell the Toledo refinery and pay full emphasis on the lucrative logistics and retail businesses, which are capable of generating higher value and profit for the company. We believe that this deal forms a part of management's strategic initiatives intended to improve performance and competitiveness of the company in a cost-effective manner to cope with the bearish refining margin environment.

However, until there is more visibility on refining margin improvement, we see limited upside for the stockand assign a long-term Neutral recommendation for the stock.

 
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