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Independent refiner and marketer of petroleum products, Sunoco Inc. (NYSE:SUN) reported significantly better-than-expected second quarter 2010 results, driven by steady earnings from most of its business segments [see transcript]. Earnings per share, excluding special items, came in at $1.31, outshining the Zacks Consensus Estimate of 74 cents. The reported quarter result was substantially ahead of the loss per share of 27 cents in the second quarter 2009.

Including the after-tax provision for pension settlement losses and related costs, earnings for the quarter came in at $1.20 per share as compared with the loss of 47 cents per share in the prior-year period.

Sunoco generated total revenue of $9.59 billion in the quarter, up 31.4% from the second quarter of 2009 and surpassed the Zacks Consensus Estimate of $9.29 billion.

Refining & Supply

Keeping in line with the company’s expectation, the Refining & Supply segment earned $86 million during the quarter, against a loss of $77 million in the year-earlier period, mainly on account of higher realized margins and lower expenses, partially offset by lower production volumes.

Realized margin averaged $7.34 per barrel, up 101.1% from the second quarter of 2009, reflecting a strong refining margin environment. Total production was down approximately 7.8% year over year to 664.2 thousand barrels per day (MBbl/d), mainly due to the idle Eagle Point refinery.

Retail Marketing

The Retail Marketing segment generated a profit of $45 million versus $10 million in the year-ago quarter, reflecting higher average retail gasoline margins, driven by falling wholesale prices and lower expenses.

Chemicals

The Chemicals segment reported a profit (from continuing operations) of $5 million during the quarter compared with a loss of $3 million in the year-ago period. The year-over-year improvement reflects higher sales volumes and better margins.

Logistics

The Logistics segment earned $20 million, down from $26 million in the second quarter of 2009, adversely affected by lower results from crude marketing activities due to reduced market-related profits.

Coke

Sunoco’s Coke segment achieved $41 million in profits during the quarter, slightly below the $42 million achieved in the prior-year quarter.

Capital Expenditure & Balance Sheet

Capital expenditure incurred by Sunoco during the quarter was $180 million (32.2% spent on the coke business, 28.9% on refining and 27.8% on logistics).

As of June 30, 2010, Sunoco had cash and cash equivalents of $1.46 billion and long-term debt (including the current portion) of approximately $2.40 billion. Debt-to-capitalization ratio stood at approximately 42.0%.

Strategic Initiatives

Sunoco has undertaken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner, as it struggles to cope with the challenging market conditions. In this regard, Sunoco recently announced plans to spin off the metallurgical coke manufacturing business, SunCoke Energy, from the rest of the company. Sunoco will follow a well-coordinated strategic plan, invest in growth opportunities and strengthen the balance sheet, post the separation.

Our Recommendation

Sunoco is currently a short-term Zacks #2 Rank (Buy) stock. This optimism reflects our belief that the company has ample growth opportunities in the coming quarters. Moreover, the company’s cost cutting initiatives, improving margins and optimizing the performance of the refineries will also be beneficial. With the help of an efficient management team and healthy cash flow, the company will be able to sustain its profitability over the coming months.

However, considering the weak macro backdrop and the supply-demand imbalance of petroleum and chemical products, we are retaining our long-term neutral recommendation for the stock.

Source: Sunoco Earnings Rebound on Refining Margin