Sunoco (SUN) has announced that it plans to exit the refining business, intending to focus on its Retail Marketing business and the Logistics business. In addition, the company has hired Credit Suisse (CS) to conduct a strategic review of the remaining company's assets and options. The news has pushed shares of Sunoco up nearly 10% in the last two sessions, as investors applaud the deal. In addition, Sunoco announced it has completed the $500 million share repurchase program that was announce August 9th, 2011, a very remarkable feat given the short time frame. Sunoco purchased 13.12 million shares at an average price of $34.74. Given Sunoco's obvious moves to maximize shareholder value, it's worth a look at what will be left of Sunoco after the exit from the refining business, and what value the market is placing on these assets.
Splitting off business units is nothing new for Sunoco. It has already sold the Chemicals business, and in July, SunCoke (SXC), Sunoco's coke business, held an IPO, selling 13,340,000 shares to the public. Sunoco still owns 81% of SXC as of the most recent quarterly filing, coming out to around 54 million shares, which are worth about $750 million at today's prices of SXC. Sunoco has said it intends to spin-off the remaining shares in SXC to shareholders sometime in the 12 months after the IPO, effectively shrinking the company. Sunoco also owns the General Partner of Sunoco Logistics Partners (SXL), a 2% general partner interest, as well as 29.77% of the limited partner units. These 9.86 million SXL units are worth another $830 million at today's prices, and come with a yearly distribution of $4.86 and growing. Adding the $750 million from SXC and the $830 from SXL gives $1.58 billion in holdings of other publicly traded companies, a third of Sunoco's $4.73 billion market cap. Subtract out another $1.4 billion in cash Sunoco had on their balance sheet at the end of Q2, and you are left with a value of $1.75 billion for the Refining & Supply assets, the Retail Marketing business, and the GP interest in SXL.
Now, with Sunoco attempting to sell its two refineries in Pennsylvania and exit that business, it's worth trying to establish what the assets will sell for. The refineries, a 335,000 barrels per day (bpd) Philadelphia refinery and the 178,000 bpd Marcus Hook refinery, have been poor performers for Sunoco for the last few years. The East Coast refiners are at a disadvantage to their Midcontinent competitors, unable to benefit from the lower WTI prices caused by the glut of oil in Cushing, OK. This makes the refineries far less profitable than others in the US, explaining Sunoco's inability to consistently run the business profitably. The company has previously sold a 170,00 bpd Toledo refinery for $400 million, and has reportedly received interest in the two remaining refineries. Conservatively estimating that $400 million price can be repeated for each of the remaining refineries places another $800 million in the pockets of Sunoco. Subtracting this from our previous value of the company leaves a $950 million.
Stripping out the Refining & Supply, Logistics, Coke and Chemicals businesses and just focusing on the Retail Marketing business leaves you with a business with YTD 2011 pretax income of $81 million, compared to $110 million in after tax earnings in 2010. The business, which sells gasoline and diesel at 4,900 stations, is trading at 8.6 times the trailing 12 months earnings, far below the 20 P/E that competitor Caseys General Stores (CASY) is currently sporting. Throw in that the remaining business also still owns the GP interest in SXL, and Sunoco looks even more cheap. Shares should easily be able to surpass their 52 week high of $46.98 as the divestments continue, and could move well into the $50 range, should the strategic review advise to break up the company completely.
Whatever the results of the strategic review, Sunoco has proven its commitment to maximizing shareholder value over the past few years. Its not too late for investors to get into the name, and continue to benefit as management continues to unlock value from the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.