September 7, 2011 [OPIS] - The expected announcement of Sunoco's plan to exit refining receives mostly positive feedbacks from banks, but Sunoco's earnings estimates for 2011-2013 are cut to reflect the refinery shutdown plan, according to equity reports issued by banks covering the Northeast refiner.
However, Sunoco’s share price target remains unchanged.
Sunoco announced on Tuesday its intention to exit refining by divesting its remaining assets or idling the facilities by July 2012 if no buyers are found. Sunoco also stated that it is conducting a strategic review of its remaining logistics and retail businesses and the use of its growing cash position to deliver the most value to shareholders. Macquarie Capital expects Sunoco’s refining segment to post negative EBITDA through 2012, thus the assets are likely worth more in shut down mode than as going concerns.
Sunoco’s long-term refining business outlook is weak at best, the bank said. Sunoco management stated it expects an estimated $200 million of after-tax proceeds ($1.85/share) upon idling the plants.
The valuation may appear underwhelming but the bank’s going concern value was approximately minus $100 million, thus the $300 million net upside as a positive result.
Sunoco’s actions help eliminate uncertainty over its refining asset value, which in turn gives greater clarity on sum-of-parts valuation.
Macquarie’s updated analysis suggests fair value for Sunoco in the $44.00-49.30/share range, which includes nearly $22.00/share in existing or expected cash in the coming years.
The bank currently sticks with the low end of its range to remain conservative, thus maintaining its $44 target.
In an increasingly difficult macro tape, the asset monetization thesis for Sunoco remains unique. The distribution of value from Sunoco’s refining and coke segments have become relatively known entities and the company’s remaining interests in logistics and retail represent relatively stable businesses.
The potential upside to the bank’s target may not appear overly compelling, but the stock could perform well near-term given current market conditions. Accordingly, Macquarie maintains its Outperform rating.
Macquarie lowered its 2011 earnings per share estimates to minus $0.02 from $0.42, 2012 to $1.31 from $3.69, and 2013 to $1.76 from $4.45 to account for current market conditions and future loss of refining.
RBC Capital said that the announcement to exit the refining business was not a surprise because Sunoco had sold or closed three other refineries since the current management team assumed control of the company in August 2008, and because Sunoco’s refining segment has lost money in eight of the last nine quarters.
The logistics segment appears to be the main focus of future growth for the company, and Sunoco’s management announced it was performing a strategic review of its options.
RBC is maintaining its Sector Perform rating and $40/share sum-of-the-parts price target for Sunoco. Sunoco will record an impairment charge in the $2.0-$2.5 billion range, but could report a gain of about $2 billion from the sale of inventories at the refineries, depending on market prices at the time of sale. After accounting for taxes, severance payments, contract penalties, etc., management expects to realize approximately $200 million of cash.
This total excludes any proceeds from other uses of the refining assets, and management stated that the Marcus Hook, Pa., refinery could be used as a terminal while the Philadelphia refinery has a large plot of land near Center City and could potentially be sold to a manufacturing company. RBC Capital’s forecast calls for Sunoco to earn $0.70 per share in 2011 and $2.60 per share in 2012.
Sunoco is currently trading at 6.0x 2011E EV/EBITDA compared to the peer group average of 2.9x 2011E EV/EBITDA and the historical trading range of 4-6x EV/EBITDA, according to our calculations.
