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As per reports, Sunoco Inc. (NYSE:SUN) and Carlyle Group LP (NASDAQ:CG), a private equity firm, have finalized a joint-venture (JV) deal as on July 2, 2012, to save and expand the Philadelphia refinery owned by Sunoco Inc (the largest U.S. East Coast refinery), in a bid to capitalize on the national boom of unconventional production, in order to turn around the refinery's economics.

According to the announcement, Sunoco will retain a minority stake in the 330,000 barrel per day Philadelphia, Pennsylvania refinery, and Carlyle will be the majority shareholder with charge of daily operations, under the terms of the deal. JPMorgan Chase & Co (NYSE:JPM) will handle crude supplies and fuel sales for the refinery through its physical commodities trading desk.

Carlyle and Sunoco also plan to build a high-speed rail facility to feed the plant with cheap domestic crude, reducing the significant costs associated with importing expensive crude oil, which had previously wrecked margins and forced the U.S. refiner to decide between looking for buyers or shutting down the refinery.

The JV plans to exploit the low-cost abundant supply of natural gas from the nearby Marcellus Shale deposit, to reduce the costs of running the plant. It also plans to upgrade the plant, which could help the refinery meet new lower sulfur fuel requirements.

It was reported that Mr. Phil Rinaldi will be the Chief Executive Officer of the JV. Rinaldi is an industry veteran, who helped turn around the struggling Coffeyville, Kansas refinery, and make it profitable almost a decade ago.

Background

In March 2011, Sunoco completed the transaction related to the sale of its Toledo refinery and related crude oil and refined product inventories, to a wholly-owned subsidiary of PBF Holding Company LLC, and received $1,037 million in net proceeds for the deal.

In September 2011, Sunoco announced its intention to sell the refining business, and initiated a formal process to sell its remaining refineries located in Philadelphia and Marcus Hook, PA. Sunoco shut the main processing units at its Marcus Hook refinery in December 2011, due to deteriorating refining market conditions, for an indefinite amount of time. However, the company has received no proposals for the sale of the Marcus Hook refinery up till now. Therefore, the company is pursuing other options and alternate uses for the facility.

In April 2012, Sunoco announced that it had entered into discussions with The Carlyle Group regarding a potential joint venture at its Philadelphia refinery. However, in case a suitable transaction could not be reached, the company intended to permanently shut the main processing units at the Philadelphia refinery in 3Q2012.

Profitability

SUN's refining business has been in losses due to lower margins, since expensive crude oil has to be imported, which erodes the segment's profitability.

(click to enlarge)

Source: 10Q

As seen from the data given above, the refining and supply businesses incurred losses. An improvement in the profitability of the said businesses was due to the sale of the Toledo refinery, and the shutting down of the Marcus Hook refinery.

The company enjoyed huge LIFO inventory gains, due to which it was profitable in 1Q2012, as compared to the same period in the previous year.

(click to enlarge)

Source: 10Q

Refining and Supply had a pretax loss totaling $87 million in 1Q2012 compared to a loss of $138 million in 1Q2011. The wholesale margin declined, while the dependence on imported crude oil increased to 90%.

Outlook

As is evident above, the refining business was a drag on the profitability of SUN, and a proposed JV will be beneficial to the company in the long run, as it can focus on its profitable business segments.

The availability of cheaper domestic crude oil due to the boom in unconventional production will be a turnaround for not only the JV, but also other refineries such as Tesoro Corp (NYSE:TSO), Valero Energy Corp (NYSE:VLO) and Marathon Petroleum Corp (NYSE:MPC). The availability of cheap natural gas will also be beneficial for refiners to power their plants.

The JV plans to run 50 percent domestic Midwest crude within two years, as compared to 90% of the crude oil being imported as of 1Q2012, which will be a turnaround for refinery operations and profitability.

Source: Sunoco: Carlyle Refinery Deal Signals A Turnaround